Question

Schedule Y-1-Married Filing Jointly or Qualifying Widow(er) If taxable income But not is over: Over: The tax is: $ 0 $ 19,750 $ 80.250 $171,050 $ 19,750 10% of taxable income $ 80,250 $1,975 plus 12% of the excess over $19,750 $171,050 $9,235 plus 22% of the excess over $80,250 $326,600 $29,211 plus 24% of the excess over $171,050 $414,700 $66,543 plus 32% of the excess over $326,600 $622,050 $94,735 plus 35% of the excess over $414.700 $167,307.50 plus 37% of tlie excess over $622.050 $326,600 $414,700 $622,050

Answer 1

Find out how much current tax this strategy could save Orie and Jane. How much income should be left in the corporation?

Answer:-

Assuming Orie and Jane’s goal is to minimize their current federal income tax exposure, one can compare the married filing joint and corporate tax rates to achieve this goal. Since Orie and Jane have $200,000 of taxable income not related to their sole proprietorship, they are currently in the 24 percent tax bracket. The task is to allocate the $250,000 between Orie and Jane and their corporation to minimize their current liability. The corporate tax rate is 21 percent and is lower than Orie and Jane’s marginal tax rate of 24 percent. To take advantage of the 21 percent corporate tax rate, all of the expected $250,000 in profits should be retained in the corporation. Any income shifted to Orie and Jane would be taxed at a rate higher than the corporate tax rate of 21 percent.

This strategy will save Orie and Jane $19,800 calculated as:

The tax on $450,000 of taxable income reported

by Orie and Jane assuming that they operate their business
as a sole proprietorship. $107,090 ^*

*Working:- ( $450,000 – $414700 ) * 35% + $94,735

Less:

The tax on $200,000 of taxable income reported
by Orie and Jane assuming that they incorporate the business – $36,159
and the tax on $250,000 profits retained in the corporation   – $48,159
= $22,772.

Workings:

Tax on $200,000:-

( $200,000 – $171,050 ) * 24%. + $29,211 = $36,159

Tax on $250,000:-

( $250,000 – $171,050 ) *24% + $29,211. = $48,159