Question

Each year, Tom and Cindy Bates (married filing jointly) normally have itemized deductions of $20,000 (which includes an annual $4,000 pledge payment to their church). Upon the advice of a friend, they do the following: In early January 2019, they pay their pledge for 2018; during 2019, they pay the pledge for 2019; and in late December 2019, they prepay their pledge for 2020. 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 2019? Assume that the itemized deductions of $20,000 already included one year of the church pledge payments. $ What will be the Bates' tax saving if their marginal tax bracket is 24% for all three years? (Assume that the standard deduction amounts for 2019 and 2020 are the same.) By concentrating their charitable contributions, their tax savings becomes $. c. Complete a letter to Tom and Cindy Bates (8212 Bridle Court, Reston, VA 20194) summarizing your analysis. Young, Nellen, Hoffman, Raabe, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 22, 2019 Mr. and Mrs. Tom Bates 8212 Bridle Court Reston, VA 20194 Dear Mr. and Mrs. Bates: In response to your inquiry regarding the Federal income tax consequences of consolidating your charitable contributions for 2018, 2019, and 2020 into a single year (2019), here is a brief summary of the outcomes: As individual taxpayers are presumed to be on the cash , all cash expenditures during a year will be evaluated in determining deductibility. In this case, combining the three $4,000 contributions into a single year makes sense from an income tax perspective. By combining all three payments in 2019, you will be able to itemize your deductions in that year, while using the standard deduction in 2018 and 2020. These $8,000 of additional contributions in 2019 (the $4,000 payments for 2018 and 2020) will mean that you will have total itemized deductions of $. Your tax savings by consolidating these contributions in 2019 will be $. If I can be of further assistance to you in this matter, please do not hesitate to contact me. Sincerely, Heywood R. Floyd Partner

Answer 1

1) By concentrating the payment of three years of charitable contributions (2018,2019,2020) int one year, this will allow the Bates to itemized their deductions from AGI in 2019 otherwise their itemized deductions (normally $20,000) are of no benefit, as they do not exceed the standard deductions ( $12,700 for 2018 and $24,000 for 2019 ).

2) Presuming the $20,000 of normal itemized deductions already includes one year of church pledge payments, the additional payment of $8,000 ($4,000for 2017 and $4,000 for 2020) yield itemized deductions $28000 ($20,000+$8,000) for 2019. This exceed the standard deduction that would have been claimed by the amount of $4,000($28,000-$24,000) Therefore, the tax saving by concentrating the charitable contribution becomes $960 ($4000*24%). The same tax that would ave been paid will result for 2018 and 2020 as the standard deduction is claimed for each of these years.

3)  Letter of Tom and Cindy Bates is shown as follows:

January 25, 2020

Mr. and Mrs. Tom Bates

8212 Bridle Court

Reston, VA 20194

In response to your inquiry in regarding in the federal income tax consequence s of consolidating your charitable contribution for 2018 , 2019 and 2020 into a single year (2019). Here is the brief summary of the outcomes:

• An individual tax payer is assumed to be on a cash basis, all cash expenditure during a year will be evaluated in determined the deductibility. In these case combining the three $4,000 contributions into a single yeas makes sense from an income tax perspective.
• By combining all the three payments in 2019, you will able to itemize your deductions in that year , while using the standard deduction amount in 2018 and 2020.
• These $ 8,000 of additional contributions in 2019 ( the $ 4,000 payments for 2018 and 2020.) will mean that you will have total itemized deductions of $28,000 (Which exceed the 2019 married filing jointly standard deduction times your marginal tax rate of 24%).
• Your tax saving by consolidating these contributions in 2019 will be $960 ($4,000*24%).