Problem
Salary vs. Dividends. Elizabeth owns 100% of Omega Corporation's stock and also runs the company as its CEO. Omega is a C corporation that expects to earn $400,000 before deducting any salary paid to Elizabeth. Elizabeth wants the corporation to pay her $250,000 for the current year in pre-tax dollars. She is considering three different options: (i) a $250,000 dividend, (ii) a $125,000 dividend plus a $125,000 salary, or (iii) a $250,000 salary. Any dividends qualify for the preferential capital gains tax rates. Elizabeth's husband has no earnings of his own in the current year, so her income is the sole source for the family. Elizabeth and her husband file a joint tax return and claim the standard deduction for the current year. Calculate the total tax liability (corporate and individual) for each of the three options, and determine which option results in the lowest overall tax. Ignore payroll taxes on the salary