52L09 Each year Tom and Cindy Bates report itemized deductio

52,L0.9 Each year, Tom and Cindy Bates report itemized deductions of $10,000, including a $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; dur- ing 2017, they pay the 2017 pledge; and in late December 2017, they prepay their 2018 pledge. a. Explain what the Bateses are trying to accomplish. b. What will be the 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.) Write a letter to Tom and Cindy Bates (8212 Bridle Court, Reston, VA 20194) summarizing your analysis. c.

Solution

a) By concentrating the payment of three years of charitable contributions (2016, 2017 and 2018) into one year, this will allow the Bates to itemized their deductions from AGI in 2017, otherwise their itemized deductions (normally $10,000) are of no benefit, as they do not exceed the standard deduction ($12,600 for 2016 and $12,700 for 2017).

b) Presuming the $10,000 of normal itemized deductions already includes one year of church pledge payments, the additional payment of $8,000 ($4,000 for 2016 and $4,000 for 2018) yields itemized deductions $18,000 ($10,000+$8,000) for 2017. This exceeds the standard deduction that would have been claimed by the amount of $5,300 ($18,000 - $12,700). Therefore the tax savings by concentrating the charitable contributions becomes $1,325 ($5,300*25%). The same tax that would have been paid will result for 2016 and 2018 as the standard deduction is claimed for each of these years.

c) Letter to Tom and Cindy Bates is shown as follows:-

January 29, 2018

Mr. and Mrs. Tom Bates

8212 Bridle Court

Reston, VA 20194

In response to your inquiry regarding the federal income tax consequences of consolidating your charitable contributions for 2016, 2017 and 2018 into a single year (2017), here is a brief summary of the outcomes: