Question

Purple Company has $200,000 in net income for 2018 before deducting any compensation or other payment to its sole owner, Kirsten. Kirsten is single and she claims the $12,000 standard deduction for 2018. 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 2018 individual tax rate schedule to use for this problem. Assume the corporate tax rate is 21%.When required, carryout intermediate tax computations to the nearest cent and then round your final tax liability to the nearest dollar.a. If Purple Company is a proprietorship and Kirsten withdraws $50,000 from the business during the year; Kirsten claims a $40,000 deduction for qualified business income ($200,000 × 20%).Kirsten's taxable income is $148,000 and her after-tax income is _____b. Purple Company is a C corporation and the corporation 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 $158,000 and Kristen's after tax income is _____c. Purple Company is a C corporation and the corporation pays Kirsten a salary of $158,000.Kirsten's after-tax income is _____

Answer 1

Answer:

a. Kristen's taxable income = $148,000

her tax liability:

($38,700 - $9,525) x 12% = $3,501

($82,500 - $38,701) x 22% = $9,635.78

($148,000 - $82,501) x 24% = $15,719.76

total = $28,856.54

Kristen's after tax income = $200,000 - $28,856.54 = $171,143.46

b. Purple's corporate tax liability = $200,000 x 21% = $42,000

Purple's after tax income = ($200,000 - $42,000) = $158,000

Kristen's taxable income is $146,000 (qualified dividends are included in AGI but taxed at different rate), her tax rate will be 15%. Kristen's after tax income = $158,000 - ($146,000 x 15%) = $136,100

c. Kristen's tax liability on ordinary income ($158,000) = $28,376.54

Kristen's tax liability on qualified dividends = ($42,000 x 0.79) x 15% = $4,977

total tax liability = $33,353.54

Kristen's after tax income = $158,000 + $33,180 - $33,353.54 = $157,826.46