Jane owns100% of Carnate Corp
Jane owns100% of Carnate Corporation’s stock and also runs thecompany as its CEO. Carnate is a C corporation that expects to earn$420,000 before deducting any salary paid to Jane. Jane wants thecorporation to pay her $230,000 for current year in pretax dollars.She is considering three different options: (1) a $230,000dividend. (2) a $115,000 dividend plus a $115,000 salary, or (3) a$230,000 salary.
Any dividends qualify for the preferential capital gains taxrates. Jane’s husband has no earnings of his own in the currentyear, so her income is the sole source for the family.Jane and herhusband file a joint tax return and claim the $24,000 standarddeduction.
|
Married, Filing Joint and Surviving Spouse |
||||||
|
If taxable income is: |
The tax is: |
|||||
|
Not over $19,050. . . . . . . . . . . . . . . . . . . . . . |
10% of taxable income. |
|||||
|
Over $19,050 but not over $77,400. . . . . . . |
$1,905.00 + 12% of the excess over $19,050. |
|||||
|
Over $77,400 but not over $165,000. . . . . . |
$8,907.00 + 22% of the excess over $77,400. |
|||||
|
Over $165,000 but not over $315,000. . . . . |
$28,179.00 + 24% of the excess over $165,000. |
|||||
|
Over $315,000 but not over $400,000. . . . . |
$64,179.00 + 32% of the excess over $315,000. |
|||||
|
Over $400,000 but not over $600,000. . . . . |
$45,689.50 + 35% of the excess over $400,000. |
|||||
|
Over $600,000. . . . . . . . . . . . . . . . . . . . . . . . |
$80,689.50 + 37% of the excess over $600,000. |
|||||
|
Preferential Rates for Adjusted Net Capital Gain (ANCG)and Qualified Dividends |
||||||
|
LTCG Rate |
Single |
Filing Jointly* |
Head of Household |
|||
|
0% |
Up to $38,600 |
Up to $77,200 |
Up to $51,700 |
|||
|
15% |
> $38,600 but not over $425,800 |
> $77,200 but not over $479,000 |
> $51,700 but not over $452,400 |
|||
|
20% |
Over $425,800 |
Over $479,000 |
Over $452,400 |
|||
* The corresponding amounts if married filing separately arehalf of the amounts for filing jointly. The preferential rate iszero for taxable income up to
$ 38 comma 600$38,600
if married filing separately.
Calculate the total tax liability (corporate and individual)for each of the threeoptions, and determine which option resultsin the lowest overall tax.
Answer:
A1) For the first option, $230,000 dividend paid to Jane
Dividends qualify for the preferential capital gains tax rates15% above $77,200 as they are filling tax returns jointly
Total Tax Liability if done jointly is $22920
Total Tax Liability if done separately will be$230,000-$38,600*15%=$28,710
A2) For the second option. $115,000 dividend plus $115,000salary
Dividends qualify for the preferential capital gains tax rates15% above $77,200 as they are filling tax returns jointly
Tax Liability if done jointly from dividend is$115,000-$77,200*15%= $5,670
Tax Liability if done separately will be$115,000-$36,800*15%=$11,730
Tax Liability if done jointly or separately from salary is$115,000-$77,400*22%=$8,272+$8,907=$17,179
Total Tax Liability if done jointly from dividend and salary=$5,670+$17,179=$22,783
Total Tax Liability if done separately from dividend and salary=$11,730+ $17,179=$28,909
A3) For the third option $230,000 salary:
Total tax liability in both the cases will be$230,000-$165,000*24%=$28,179( For salary upto $165,000)+$15,600=$43,779
Option b will give the lowest overall tax of $22,783.
(Total Tax Liability if done jointly from dividend$115,000 andsalary of $115,000 =$5,670+$17,179=$22,783)
"Our Prices Start at $11.99. As Our First Client, Use Coupon Code GET15 to claim 15% Discount This Month!!"
