Question

Each year, Andy and Bonnie Carter report itemized deductions of $20,000, including a $4,000 pledge payment to their church. Upon the advice of a friend, they do the following: in early January 2018, they pay their 2017 pledge; during 2018, they pay the 2018 pledge; and in late December 2018, they prepay their 2019 pledge.

1. Explain what the Carters are trying to accomplish.
2. Prepare a detailed calculation of the tax savings, if any, if their marginal tax bracket is 24% for all three years. (Assume that the standard deduction amounts for 2018 and 2019 are the same).

Answer 1

ANSWER

1) By concentrating the payment of three years of charitable contributions (2017,2018,2019) int one year, this will allow the Bates to itemized their deductions from AGI in 2018, otherwise their itemized deductions (normally $20,000) are of no benefit, as they do not exceed the standard deductions ( $12,700 for 2017 and $24,000 for 2018 ).

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 2019) yield itemized deductions $28000 ($20,000+$8,000) for 2018. 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 2017 and 2019as the standard deduction is claimed for each of these years.

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