Monique Flaharty has accumulated securities that earn interest of $45,000 per year. Her other sources of income exceed $250,000 per year. Her 35 year old daughter Deborah has no income of her own. Her only tax credit is the basic personal tax credit. Determine the amount of federal taxes that could be saved by transferring the interest earning securities to a trust with Deborah as the income beneficiary. The trust will be required to distribute all of its income each year.

Question

Quizplus · Accepted Answer

Monique is in a high tax bracket because her other sources of income exceed $250,000 per year. By transferring the interest-earning securities to a trust with Deborah as the income beneficiary, the income earned by the trust will be taxed at Deborah's lower tax rate.

The basic personal tax credit for 2021 is $13,808. Therefore, the income from the securities that can be transferred to Deborah without affecting her basic personal tax credit is $13,808.

The remaining income from the securities that will be taxed at Deborah's lower tax rate is $45,000 - $13,808 = $31,192.

Assuming a federal tax rate of 33% for Monique and a federal tax rate of 20.5% for Deborah, the tax savings will be:
($31,192 x 0.33) - ($31,192 x 0.205) = $10,084

Therefore, the amount of federal taxes that could be saved by transferring the interest earning securities to a trust with Deborah as the income beneficiary is $10,084.

Monique Flaharty Has Accumulated Securities That Earn Interest of $45,000