Final answer:
The tax savings result from Ms. Singh shifting part of her apartment building's income to her children who are in a lower tax bracket. By transferring 20% equity to each child and retaining 60%, Ms. Singh saves $8,000 in taxes, benefiting from the lower marginal tax rates of her children.
Step-by-step explanation:
To compute the tax savings from Ms. Singh's income-shifting arrangement, we need to consider the difference in tax rates between her and her children, as well as the redistribution of the apartment building's income according to the new equity interests. The apartment building generates $80,000 in taxable income annually. Without income shifting, Ms. Singh would pay 37% of $80,000 in taxes, which amounts to $29,600. With the proposed income shifting, Ms. Singh will retain a 60% interest, and each child will hold a 20% interest.
Now, let's calculate the tax due after income shifting:
- Ms. Singh's share of income: 60% of $80,000 = $48,000
- Each child's share of income: 20% of $80,000 = $16,000
Taxes paid by Ms. Singh at 37%: 37% of $48,000 = $17,760
Taxes paid by each child at 12%: 12% of $16,000 = $1,920
Total taxes paid by children combined: $1,920 x 2 = $3,840
Total taxes after income shifting: Ms. Singh's taxes + children's taxes = $17,760 + $3,840 = $21,600
Tax savings from income shifting: Original taxes - Total taxes after income shifting = $29,600 - $21,600 = $8,000
Hence, by redistributing a portion of the income to her children, Ms. Singh can save $8,000 in taxes, as her children are taxed at a lower marginal rate.