Crocker and Company,Inc.had taxable income of $550,000.At the end of the year,it distributes all its after-tax earnings to Jimmy,the company's sole shareholder.Jimmy's marginal ordinary tax rate is 34 percent and his marginal tax rate on dividends is 15 percent.What is the overall tax rate on Crocker and Company's pre-tax income?

Question

Quizplus · Accepted Answer

The overall tax rate on Crocker and Company's pre-tax income is the sum of the corporate tax rate and Jimmy's tax rate on the dividend. Crocker and Company's taxable income of $550,000 results in a corporate tax liability of $550,000 x 21% = $115,500. The after-tax earnings that Jimmy receives is equal to $550,000 - $115,500 = $434,500. Jimmy's tax liability on the dividend is $434,500 x 15% = $65,175. Therefore, the overall tax rate on Crocker and Company's pre-tax income is ($115,500 + $65,175) / $550,000 = 43.9%. The correct answer is D.