Joanna has a 35% marginal tax rate and owns 100% of the stock of Loman Corporation. This year, Loman generated $400,000 of taxable income, paid $84,000 of corporate income tax, and paid a $50,000 dividend to Joanna. Suppose that the federal income tax system has been amended to allow shareholders to gross up dividend income by the corporate tax paid with respect to the dividend and credit this tax against their individual tax. Further assume that dividends-received by individuals are not eligible for a preferential tax rate. Calculate Joanna's reported dividend income and her tax due on the dividend.

Question

Quizplus · Accepted Answer

Joanna's grossed-up dividend income is $50,000 + ($84,000/$400,000)*$50,000 = $63,291. Her tax due is 35% of $63,291 minus the tax credit of $10,500, resulting in $8,861.

Joanna Has a 35% Marginal Tax Rate and Owns 100