Question

George and Margaret Wealthy are in the 42 percent tax bracket, considering both federal and state personal taxes. Norman Briggs, then CEO of Community General Hospital, has been aggressively pursuing the couple to contribute $400 thousand to the hospital’s soon-to-be-built Cancer Care Center. Without the contribution, the Wealthy’s taxable income for 2014 would be $3 million. What impact would the contribution have on the Wealthy’s 2014 tax bill?

Answer 1

Answer:

Wealthy's tax bill stand reduced by $168,000

Explanation:

These donations amount for complete deduction.

Income before deduction = $3,000,000

Tax rate = 42%

Therefore tax before deduction = $3,000,000 $\times$ 42% = $1,260,000

Since the donation is completely deductible:

Income after deduction = $3,000,000 - $400,000 = $2,600,000

Tax thereon:

$2,600,000 $\times$ 42% = $1,092,000

Reduction in tax paid = Tax paid without donation - Tax paid after donation

= $1,260,000 - $1,092,000 = $168,000