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# 1-3 - 72 Joey and Camilla are married and have three...

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72. Joey and Camilla are married and have three children, ages 8, 16, and 18. They own a commercial cleaning business that is organized as a sole proprietorship and makes \$120,000 annually. They have \$30,000 of other taxable income (net of allowable deductions). The issue is what Joey and Camilla can do to decrease their tax liability. They currently pay \$30,264 {\$26,637.50 + [(\$150,000 - \$137,050) x 28%]} of income tax on their \$150,000 of taxable income. One option is to incorporate their cleaning business. A corporation pays a 25% marginal tax rate on up to \$75,000 of taxable income. To minimize their taxes, they could have the corporation pay them \$45,000 (\$120,000 - \$75,000) in salary. The corporation’s taxable income would be \$75,000 and Camilla and Joey’s taxable income would be \$75,000. The total tax liability under this arrangement would be \$24,875, a savings of \$5,389 (\$30,264 - \$24,875): Corporate tax on \$75,000 \$7,500 + [(\$75,000 - \$50,000) x 25%] \$13,750 Married, filing jointly tax on \$75,000: \$9,350 + [(\$75,000 - \$67,900) x 25%] 11,125 Total tax liability \$24,875 Tax without incorporation 30,264 Tax savings from incorporation \$ 5,389 Another tax savings opportunity would be to employ their 16 and 18 year children in the business. Each child could earn up to \$5,700 (standard deduction amount) tax-free. This would reduce the taxable income of either the sole proprietorship or the corporation, resulting in tax savings at either the parent’s 28% marginal tax rate (if they continue to use the sole proprietorship) or the corporation’s 25% marginal tax rate. Any income they receive above \$5,700 would be taxed at 10%, resulting in additional tax savings. For example, if Camilla and Joey incorporate their business as suggested above and each of the two children are paid \$6,000, the total tax liability would be \$21,935: Corporate tax on \$63,000 (\$75,000 - \$6,000 - \$6,000): \$7,500 + [(\$63,000 - \$50,000) x 25%] \$10,750 Married, filing jointly tax on \$75,000: \$9,350 + [(\$75,000 - \$67,900) x 25%] 11,125 Tax on \$6,000 for each child:

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(\$6,000 - \$5,700) x 10% = \$30 x 2 60 Total tax liability \$21,935
73. INTERNET ASSIGNMENT The purpose of this assignment is to introduce you to the tax information provided by the Internal Revenue Service on its World Wide Web site (http://www.irs.gov/). Go to this site and look at the various types of information provided and write a short summary of what the IRS offers at its site. Chapter 1 discusses the audit and appeals process. Locate Publication 17, Tax Information for Individuals, and find the discussion of the examination and appeals process. Print out the text of this discussion. Clicking on "Individuals" provides a list of items, one of which is Publication 17. Click on Publication 17 and a PDF file will open. Scroll down the “Bookmarks” on the left-hand side and then

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1-3 - 72 Joey and Camilla are married and have three...

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