Question

# Ms. Xie, who is in the 37 percent tax bracket, is the sole shareholder and president...

Ms. Xie, who is in the 37 percent tax bracket, is the sole shareholder and president of Xenon. The corporation’s financial records show the following:

 Gross income from sales of goods \$ 1,632,000 Operating expenses (944,000 ) Salary paid to Ms. Xie (314,000 ) Dividend distributions (214,000 )

Compute the combined tax cost for Xenon and Ms. Xie. (Ignore payroll tax.)

How would your computation change if Ms. Xie’s salary was \$528,000 and Xenon paid no dividends?

 Working: Particular Amount(\$) Gross income from sale of goods 1,632,000 Operating expenses (944,000) Salary paid to Ms. Xie (314,000) Total Income 374,000 Dividend distributions (214,000) Balance 160,000 Computation of tax costs Corporation tax @ 21% on \$ 374,000 \$    78,540 Tax on Ms Xie @ 37% on (\$314,000 + \$214,000) \$ 195,360 Computation will not change as tax on ordinary dividend is taxed at same rate as regular income of the assessee. However if such dividend is in nature of capital gain than tax rate will change. However in this case there will not be any change in computation as dividend income will taxed at regular tax rate in which Xie fall.

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