Question

Problem 3-43 (LO. 9) Each year, Tom and Cindy Bates (married filing jointly) report 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 2018 pledge; during 2019, they pay the 2019 pledge; and in late December 2019, they prepay their 2020 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 20197 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 se c. Complete a letter to Tom and Cindy Bates (8212 Bridie Court, Reston, VA 20194) summarizing your analysis. Maloney, Raabe, Young, Nellen, & Hoffman, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 22, 2019

Answer 1

(a) By concentrating the payment of three years of charitable contributions (2018, 20179 and 2020) into 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 deduction ($24,900 for 2018 and $25,000 for 2019).

(b) Resuming the $ 20,000 of normal itemized deductions already includes one year of church pledge payments, the additional payment of $8,000 ($4,000 for 2018 and $4,000 for 2019) yields itemized deductions $28,000 ($20,000+$8,000) for 2019. This exceeds the standard deduction that would have been given back by the amount of $3,000 ($28,000 - $25,000). Therefore the tax savings by concentrating the charitable contributions becomes $750 ($3,000*25%). The same tax that would have been paid will result for 2018 and 2020 as the standard deduction is claimed for each of these years.

(c) Letter to Tom and Cindy Bates:

January 31, 2020

Tom and Cindy Bates

8212 Bridle Court

Reston, VA 20194

In response to your enquiry 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 assumed to be on a cash basis, all cash expenditures during a year will be evaluated in determining deductions. In this case, combining the three $4,000 contributions into a single year makes sense from an income tax perspective.
• By combining all the three payments in 2019, you will be 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 exceeds the 2019 married filling jointly standard deduction times your marginal tax rate of 24%).
• Your tax savings by consolidating these contributions in 2019 will be $750 ($3,000*25%)