Question

Tawana owns and operates a sole proprietorship and has a 37 percent marginal tax rate. She provides her son, Jonathon, $11,000 a year for college expenses. Jonathon works as a pizza delivery person every fall and has a marginal tax rate of 15 percent.

What could Tawana do to reduce her family tax burden?

       

• Employ her son in her sole proprietorship

• Ask Jonathon to find a new job

• Start a new enterprise

b. How much pretax income does it currently take Tawana to generate the $11,000 (after-taxes) given to Jonathon? (Round your answer to the nearest whole dollar amount.)

       

c. If Jonathon worked for his mother’s sole proprietorship, what salary would she have to pay him to generate $11,000 after taxes (ignoring any Social Security, Medicare, or self-employment tax issues)? (Round your answer to the nearest whole dollar amount.)

  

d. How much money would the strategy save? (Round your intermediate calculations and final answers to the nearest whole dollar amount.)

       

This strategy will save Tawana $_________ pretax and will save the family $____________ after tax?

       

Answer 1

a. Employ her son in her sole proprietorship

b. Pretax income = After tax income/ ( 1- Tax rate) = 11000/ (1-37%) = 17460

c. Pretax income = After tax income/ ( 1- Tax rate) = 11000/ (1-15%) = 12941

d. This strategy will save Tawana $ 4519 (71460-12941) pretax and will save the family $ 2847 ( 12941 *(37%-15%)) after tax.