Chapter
4
Basic Maxims of Income
Tax Planning
INCOME SPLITTING: ALLOCATING INCOME
ACROSS DIFFERENT TAXPAYING ENTITIES

Two primary taxable entities:
 Corporations
 Individuals

Taxable entities each have their own tax rate
schedules:
 Individual
tax rates range from 10% to 43.4%*
 Corporate rates range from 15% to 35%
EXAMPLE

Jamie operates a business that generates taxable income
of $100,000. If she is single, and operates as a sole
proprietorship, she would calculate her tax as follows
(based on 2016 tax rate schedules):
0 -- 9,275 @ 10%
 9,276 -- 37,650 @ 15%
 37,651 – 91,150 @ 25%
 91,151 – 100,000 @ 28%
Total tax liability

→ $ 927.50
→
4,256.25
→ 13,374.75
→
2,477.72
$21,035.92
Note: 2016 tax rates here: http://taxes.about.com/od/rates/fl/federal-income-tax-rates-forthe-year-2016.htm
EXAMPLE (cont)

Now assume that Jamie operates the business through a
wholly-owned corporation, and that she pays herself a
salary of $50,000, which is deducted from the
corporation’s taxable income. Thus, Jamie and the
corporation will each have $50,000 taxable income
(ignoring Jamie’s standard deduction and personal
exemption). Jamie’s tax liability would now be:
0 -- 9,275 @ 10%
→ $ 927.50
 9,276 -- 37,650 @ 15%
→
4,256.25
 37,651 – 50,000 @ 25%
→
3,087.50
Total individual tax
$8,271.25
(See next slide for corporate tax)

EXAMPLE (cont)

The remainder of the income would be taxed on the
corporate tax return, which is subject to its own rate
schedule. The first $50,000 of corporate taxable income
is taxed at 15%. Thus, the corporate tax, and the total tax
on the total income from the business is calculated as
follows:


Corporate tax ($50,000 @ 15%) $7,500.00
Jamie’s individual tax (pr. slide) $8,271.25
Total tax
$15,771.25
Sole proprietor tax (1st ex)
$21,035.92
Tax savings from splitting
income between 2 returns $ 5,264.67
Note: corporate tax rates here: http://www.smbiz.com/sbrl001.html