Ward and June are in the 28% tax bracket.Included in their assets is a Dell Corporation bond with a face value of $10,000.The bond pays $1,000 per year in interest.Ward and June gift the bond to their son,Wally (age 19),on January 1,2016.Wally is in the 10% tax bracket.Wally's taxable income from the receipt of the bond and the bond interest in 2016 is

Question

Quizplus · Accepted Answer

Since Ward and June are in the 28% tax bracket, their tax on the $1,000 bond interest would be $280 ($1,000 x 0.28). When they gift the bond to Wally, they also gift the tax liability associated with the bond interest. However, since Wally is in the 10% tax bracket, his tax on the $1,000 bond interest would be only $100 ($1,000 x 0.1). Therefore, Ward and June will not have to pay the higher tax rate, and Wally will only owe $100 in taxes on the bond interest. Wally does not realize any taxable income from the gift of the bond itself, so the total taxable income for Wally in 2016 is $1,000 for the bond interest. Choice B is the correct answer.

Ward and June Are in the 28% Tax Bracket