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.
a. What could Tawana do to reduce her family tax burden?
b. How much pretax income does it currently take Tawana to generate the $8,000 after-taxes given to Jonathon?
c. 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)?
d. How much money would this strategy save?