Farouk transfers bonds with a face value of $10,000 into his dependent son's name on January 1, 2011 as his son will turn 24 this year. The bonds pay 8 percent interest annually and Farouk bought the bonds in 2003 for $9,500. His son sells the bonds for $10,500 at the end of 2011 after receiving the 2011 interest. If Farouk is in the 35 percent marginal tax bracket, how much did he save in 2011 in taxes by transferring the bonds into his son's name. His son had no other income in 2011.

Question

Quizplus · Accepted Answer

The Answer is Farouk's tax if owned: $10,000 x .08 = $800 interest x .35 = $280
$10,500 - $9,500 = $1,000 gain x .15 capital gains rate = $150 tax if owned by Farouk
Son's tax: $1,000 gain + $800 interest - $950 standard deduction = $850 taxable income taxed at 0% capital gains rate. $950 x 0% = $0
Taxes saved in 2011 = $280 + $150 = $430

Farouk Transfers Bonds with a Face Value of $10,000 into His