McGraw-Hill's Taxation of Individuals and Business Entities 3rd Edition by Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

Exercise 39

Tawana owns and operates a sole proprietorship and has a 40 percent marginal tax rate.She provides her son, Jonathon, $8,000 a year for college expenses.Jonathon works as a pizza delivery person every fall and has a marginal tax rate of 15 percent.What could Tawana do to reduce her family tax burden? How much pretax income does it currently take Tawana to generate the $8,000 after-taxes given to Jonathon? If Jonathon worked for his mother's sole proprietorship, what salary would she have to pay him to generate $8,000 after taxes (ignoring any Social Security, Medicare, or self-employment tax issues)? How much money would this strategy save?