Kristen, the president and sole shareholder of Egret Corporation, has earned a salary bonus of $30,000 for the current year. Because of the lower tax rates on qualifying dividends, Kristen is considering substituting a dividend for the bonus.
Assume that the tax rates are 28% for Kristen and 34% for Egret Corporation.
a. How much better off would Kristen be if she were paid a dividend rather than salary?
b. How much better off would Egret Corporation be if it paid Kristen a salary rather than a dividend?
c. If Egret Corporation pays Kristen a salary bonus of $40,000 instead of a $30,000 dividend, how would your answers to (a) and (b) change?
d. What should Kristen do?