Question

Ramon has decided to make a cash gift to the American Heart Association of $113,000. However, he is considering delaying his gift until next year when his AGI will increase to $300,000 and he will be in the 32% income tax bracket, an increase from his current-year income tax bracket of 24%.
Assume a 6% discount rate. The present value factors, at a 6% discount rate, are as follows:

Year PV factor at 6%
1 0.9434
3 0.8396
5 0.7473

Ramon asks you to determine the tax savings from the tax deduction in present value terms if he were to make the gift this year, rather than delaying the gift until next year. For purposes of this analysis, ignore the potential impact of the overall limitation on certain itemized deductions.

Total present value of tax savings from the tax deduction if made this year:$________
Total present value of tax savings from the tax deduction if made next year: $_______

Answer 1

Answer: See explanation

Explanation:

Since the AGI is given as $180,000, his charitable contribution will be:

= $180,000 × 60%

= $180,000 × 0.6

= $108,000

a. The Total present value of tax savings from the tax deduction if made this year will be:

Present value of tax savings = $108000 × 24% = $108000 × 0.24 = $25920

Add: Present value of tax savings for deferred part = ($113000 - $108000) × 0.9434 × 32% = $1509

Therefore, Total present value of tax savings from the tax deduction if made this year will be:

= $25920 + $1509.44

= $27429.44

b. Total present value of tax savings from the tax deduction if made next year will be:

= $113000 × 0.9434 × 32%

= $113000 × 0.9434 × 0.32

= $34113.34