Question

Jane owns​100% of Carnate Corporation’s stock and also runs the company as its CEO. Carnate is a C corporation that expects to earn $420,000 before deducting any salary paid to Jane. Jane wants the corporation to pay her $230,000 for current year in pretax dollars. She is considering three different options: (1) a $230,000 dividend. (2) a $115,000 dividend plus a $115,000 salary, or (3) a $230,000 salary.

Any dividends qualify for the preferential capital gains tax rates. Jane​'s husband has no earnings of his own in the current​ year, so her income is the sole source for the family.Jane and her husband file a joint tax return and claim the $24,000 standard deduction.

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 are half of the amounts for filing jointly. The preferential rate is zero 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 three​options, and determine which option results in the lowest overall tax.

Answer 1

A1) For the first option, $230,000 dividend paid to Jane

Dividends qualify for the preferential capital gains tax rates 15% 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 $115,000 salary

Dividends qualify for the preferential capital gains tax rates 15% 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 and salary of $115,000 =$5,670+$17,179=$22,783)