You have set up your tax preparation firm as an incorporated business. You took $70,500 from the firm as your salary. The firm's taxable income for the year (net of your salary) was $31,900. Assume you pay personal taxes as an unmarried taxpayer. Use the tax rates presented in Table 3.6. How much tax must be paid to the federal government, including both your personal taxes and the firms taxes? By how much will you reduce the total tax bill if you cut your salary to $51,200, thereby leaving the firm with taxable income of $51,200? What allocation will minimize the total tax bill? Hint: Think about marginal tax rates and the ability to shift income from a higher marginal bracket to a lower one.

Taxable Income ($) Single Taxpayers Married Taxpayers Filing Joint Returns Tax Rate (%) 09,950 019,900 10% 9,95040,525 19,90081,050 12% 40,52586,375 81,050172,750 22% 86,375164,925 172,750329,850 24% 164,925209,425 329,850418,850 32% 209,425523,600 418,850628,300 35% 523,600 and above 628,300 and above 37%