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Creating the Lowest Overall Combined Tax Liability

Mary (Who is single with no dependants and who does not itemize) owns 100% of Beezer Tweezer Co, which is organized as a C-Corporation. Beezer Tweezer has $400,000 of taxable income in 2011 and Mary has $34,500 of outside taxable income before any wage compensation from Beezer Tweezer. Assuming reasonable compensation for Mary's services to Beezer Tweezer would fall in the range of $150,000 to $250,000, which of the following wage distribution amounts to Mary would result in the lowest overall combined tax liability (For Mary and Beezer Tweezer)?

A) $150,000
B) $200,000
C) $250,000
D) Taking no wages from Beezer Tweezer.

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Solution Preview

The $400,000 of taxable income to the corporation doesn't affect Mary's personal income because the corporation pays its own taxes even though Mary is the sole owner. Mary has $34,500 in taxable income from other sources and can take income from $150,000 to $250,000. If she takes the lowest amount, her total taxable income is $34,500 + $150,000 = $184,500. Mary was single in 2011, so this income would put her in the 33% tax bracket. Her total tax would be $184,500 x 33% = $60,885 plus additional tax as applicable to her individual return. We would want her to choose D - take no wages from the company because her minimum liability would be $60,885. However, the IRS would certainly audit her return ...

Solution Summary

This solution provides the correct answer with complete explanation and all needed calculations to the tax liability problem presented. Includes 2 references (one from Wikipedia).