Question

Mrs. Franklin, who is in the 37 percent tax bracket, owns a residential apartment building that...

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.)

Homework Answers

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
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