Ward and June are in the 32% tax bracket. Included in their assets is a Dell Corporation bond with a face value of $10,000. The bond pays $1,000 a year in interest. Ward and June make a gift to their son, Wally (age 19) of the $1,000 in interest income. Wally is in the 10% tax bracket. What is Ward and June's tax liability related to the bond and the bond interest for the current year?

Question

Quizplus · Accepted Answer

Since Ward and June are in the 32% tax bracket, their tax liability on the $1,000 interest income from the bond is $320 (32% of $1,000). However, since they gifted the interest income to Wally, he is responsible for the taxes on it. Since Wally is in the 10% tax bracket, his tax liability on the $1,000 interest is only $100 (10% of $1,000). Therefore, Ward and June's tax liability related to the bond and bond interest for the current year is $320.

Ward and June Are in the 32% Tax Bracket