Mr. and Mrs. Maxwell are equal partners in Family partnership. The Maxwell's marginal tax rate is 35%. Next year, the partnership is expected to generate $200,000 of ordinary income. The Maxwells are considering transferring 20% interests in the partnership to each of their children. Their daughter, Melissa, has a 12% marginal tax rate. Their son, Mark, has a 22% marginal tax rate. Calculate the expected annual tax savings to the family from the proposed transfer of partnership interests.
A) $14,000
B) $28,000
C) $14,400
D) $16,000

Question

Quizplus · Accepted Answer

First, let us calculate the total tax liability of the family without any transfer:

Ordinary Income = $200,000
Mr. and Mrs. Maxwell's share = $100,000 each
Total tax liability of Mr. and Mrs. Maxwell = ($100,000 x 35%) x 2 partners = $70,000
Net income after tax = $200,000 - $70,000 = $130,000

Now, let's calculate the tax liability after the transfer:

After the transfer, Mr. and Mrs. Maxwell will have a reduced share of 80% in the partnership, and Melissa and Mark will have a 10% share each.

Mr. and Mrs. Maxwell's new share = 80% each
Melissa's share = 10%
Mark's share = 10%

Partnership income to be split:
Mr. and Mrs. Maxwell = $160,000 ($100,000 x 80% x 2)
Melissa = $20,000 ($200,000 x 10%)
Mark = $20,000 ($200,000 x 10%)

Tax calculation for each partner:
Mr. and Mrs. Maxwell: ($80,000 x 35%) x 2 partners = $56,000
Melissa: ($20,000 x 12%) = $2,400
Mark: ($20,000 x 22%) = $4,400

Total tax liability after the transfer = $56,000 + $2,400 + $4,400 = $62,800

Net income after tax = $200,000 - $62,800 = $137,200

Tax Savings = $70,000 - $62,800 = $7,200

Tax savings for the family from the proposed transfer of partnership interests would be 7,200 x 2 = $14,400. Therefore, the best choice is C.

Mr and Mrs