Question

Mrs. Franklin, who is in the 37 percent tax bracket, owns a residential apartment building that generates $98,000 annual taxable income. She plans to create a family partnership by giving each of her two children a 20 percent equity interest in the building. (She will retain a 60 percent interest.) Mrs. Franklin will manage the building, and value of her services is $23,000 per year. If Mrs. Franklin’s children are in the 12 percent tax bracket, compute the tax savings from this income-shifting arrangement. (Ignore any payroll tax consequences.)

Answer 1

Present Scenario
Total Income of Mrs. Franklin from Residential Apartment	$98,000
Tax Rate Applicable for Mrs. Franklin	37%
Total Tax liability of Mrs. Franklin	$36,260

Future Scenario	Total	Mrs. Franklin	1st Child	2nd Child
Total Income	$98,000
Service fee to Mrs Franklin	$23,000	$23,000
Remaining Balance	$75,000
Income Shared	$75,000	$45,000	$15,000	$15,000
Total Income	$98,000	$68,000	$15,000	$15,000
Applicable Tax Rate		37%	12%	12%
Tax Liability		$25,160	$1,800	$1,800
Total Tax Liability	$ 28,760
Total Tax Benefit	$ 7,500