Question

Imagine that a new tax law permits taxpayers to choose between taking an itemized deduction for cash charitable contributions or claiming a nonrefundable tax credit for the first $1,000 of cash charitable contributions (with the excess contributions nondeductible and no carryback or forward of excess amounts). For example, a taxpayer who gives $3,000 to charity may choose between claiming a $3,000 itemized deduction or a $1,000 credit. In each of the following situations, advise the taxpayer whether they should claim the itemized deduction or the new credit for charitable contributions (and support your answer with calculations). Each taxpayer is single. Use 2019 tax rates and other tax law, as found in your textbook, to answer this question. Taxpayer A gave $6,000 to charity. This taxpayer has $90,000 AGI and no other itemized deductions besides the charitable contribution. Taxpayer B gave $4,000 to charity. This taxpayer has $200,000 AGI and other itemized deductions of $14,000. Taxpayer C gave $5,000 to charity. This taxpayer has $120,000 AGI and other itemized deductions of $11,000.

Answer 1

Tax Rates of 2019 for Single tax fi

Taxable Income	Tax Rate
0-$9700	10%
$9701-$39475	12%
$39476 - $ 84200	22%
$84201-$160725	24%
$160726-$204100	32%
$204101-$510300	35%

Contribution to Charitable Institution can be utilized as a deduction from AGI or $1000 Tax credit can be availed from tax payable.

The calculation for different taxpayers is given below:

Taxpayer A: AGI $90000 and contribution to Charity $6000

Option A: Avail Tax Credit       

Taxable Income	Tax Rate	Tax Amount ($)
0-$9700	10%	970
$9701-$39475	12%	3573
$39476 - $ 84200	22%	9840
$84201-$90000	24%	1392
Total		15775
Less: Tax Credit		1000
Tax Payable		14775

Option B: Avail deduction for charity from AGIi.e taxable income=$9000-$6000=$84000

Taxable Income	Tax Rate	Tax Amount ($)
0-$9700	10%	970
$9701-$39475	12%	3573
$39476 - $ 84000	22%	9796
Tax Payable		14339

Ans: Avail Option B

Taxpayer B: AGI $200000, itemized deduction $14000 and contribution to Charity $4000

Option A: Avail Tax Credit       

Taxable Income	Tax Rate	Tax Amount ($)
0-$9700	10%	970
$9701-$39475	12%	3573
$39476 - $ 84200	22%	9840
$84201-$160725	24%	18366
$160726-$186000	32%	8088

Total		40837
Less: Tax Credit		1000
Tax Payable		39837

Option B: Avail deduction for charity from AGIi.e taxable income=$186000-$4000=$182000

Taxable Income	Tax Rate	Tax Amount ($)
0-$9700	10%	970
$9701-$39475	12%	3573
$39476 - $ 84200	22%	9840
$84201-$160725	24%	18366
$160726-$182000	32%	6808

Total

39557

Ans: Avail Option B

Taxpayer C: AGI $120000, itemized deduction $11000 and contribution to Charity $5000

Option A: Avail Tax Credit       

Taxable Income	Tax Rate	Tax Amount ($)
0-$9700	10%	970
$9701-$39475	12%	3573
$39476 - $ 84200	22%	9840
$84201-$109000	24%	5952

Total		20335
Less: Tax Credit		1000
Tax Payable		19335

Option B: Avail deduction for charity from AGIi.e taxable income=$109000-$5000=$104000

Taxable Income	Tax Rate	Tax Amount ($)
0-$9700	10%	970
$9701-$39475	12%	3573
$39476 - $ 84200	22%	9840
$84201-$104000	24%	4752

Total

19135

Ans: Avail Option B