Question

Problem 3-52 (LO.9) Each year, Tom and Cindy Bates (who file married-filing jointly) report itemized deductions of $10,000, induding an annual $4,000 pledge payment to their church. Upon the advice of a friend, they do the following: In early January 2017, they pay their 2016 pledge; during 2017, they pay the 2017 pledge; and in late December 2017, they prepay their 2018 pledge. a. What are the Bateses trying to accomplish? b. What would the Bates total itemized deductions be if all three church pledge payments were made in 20177 Assume that the itemized deductions of $10,000 already incuded one year of the church pledge payments what will be the Bates' tax saving if their marginal tax bracket is 25% for all three years? (Assume that the standard deduction amounts for 2017 and 2018 are the same.) By concentrating their charitable contributions, their tax savings becomes C. Complete a leter to Tom and Cindy Bates (8212 Bridle Court, Reston, VA 20194) summariaing your analysis. Haloney, Hoffman, Raabe, & Young, CPAS 5191 Natorp Boulevard Mason, 041 45040 November 22, 2017 8212 bridie Court Reston, VA 20194 Cell Phones Off Q W E R T A S D F GH

Answer 1

a) Standard deduction limit for the year 2016 is $12600 & for the year 2017 is $12700. Their itemized deduction for single year is $10000. Hence, Bateses are trying to get the benefit of itemized deduction by paying in single year.

b) Total Contribution for 3 years will be $18000 ($10000 for 2017 & $4000 each for 2016 & 2018). The limit for 2017 is $12700. Hence, the difference is $5300 ($18000-$12700). With marginal rate of 25%, Tax saving is ($5300*25%) i.e. $1325.

c) The blanks will be filled as:

Cash basis

Year 2017

$10000

$4000

Total allowable deduction of $18000

$1325