Question

Purple Company records $200,000 in net income for 2019 before deducting any compensation or other payment to its sole owner, Kirsten. Kirsten is single and she claims the $12,200 standard deduction. Purple Company is Kirsten's only source of income.

Ignoring any employment tax considerations, compute Kirsten's after-tax income for each of the following situations.

Click here to access the 2019 individual tax rate schedule to use for this problem. Assume the corporate tax rate is 21%.

Purple is a C corporation and pays out all of its after-tax income as a dividend to Kirsten.

Note: Individual taxpayers received preferential treatment regarding the taxation of qualified dividends (0%,15%,20%). For single taxpayers, the 0 percent rate applies to the first $38,600 of taxable income.

Purple Corporation's after-tax income is $ and Kristen's after tax income is $

Purple is a C corporation and pays Kirsten a salary of $158,000. Kirsten's after-tax income is

Answer 1

Purple Corporation's after-tax income is: $33,180

Corporation income = $200,000

Net income after paying salary and taxes = (Gross income – salary) × (1-tax rate)

= ($200,000 - $158,000) × (1-21%) = $33,180

Kristen's after tax income is $144,836.50

Particulars	Amount
Salary	$      158,000
Dividend	$         33,180
Gross income	$      191,180
Less: standard deduction	$       (12,200)
Taxable income	$      178,980
Taxable income	$      178,980
Less: dividends	$         33,180
Income taxable at normal rates	$      145,800
Tax liability	Taxable amount	Tax payable
Income taxable at normal rates	$      145,800	$ 29,166.50
[$143,82.50+($145,800-$84,200)×24%]
Dividend income	$         33,180	$   4,977.00
[$33,180 × 15%]
Total	$      178,980	$ 34,143.50
After tax income	Amount
Gross income	$ 178,980.00
Less: taxes	$   34,143.50
After-tax income	$ 144,836.50

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