Question

Maria pledged $30,000 to her church's special projects fund. She can make the contribution in December 2019 or January 2020. She is in the 35% tax bracket in 2019 and in the 24% bracket in 2020. She itemizes her deductions in both years. Assume that her discount rate is 5% and the present value factor for this rate for 1 period is 0.9524. How much will she save by taking the deduction in 2019?

a.$30,000
b.$10,500
c.$3,643
d.$0
e.$6,857

Answer 1

Maria would save $3,643 by taking the deduction in 2019. This is calculated by comparing the tax savings in both years, considering her tax brackets, and discounting the future savings by the present value factor.

Step-by-step explanation:

The question is asking how much Maria would save by making a charitable contribution in 2019 instead of 2020, considering her different tax brackets in those years and the present value of money. To calculate these savings, we must first determine the tax savings for both years. In 2019, she is in a 35% tax bracket, so contributing in December 2019 would result in a tax saving of 35% of $30,000, which is $10,500. In 2020, she is in a 24% tax bracket, so the tax saving by contributing in January 2020 would be 24% of $30,000, which is $7,200.

Since Maria should also consider the time value of money, we would discount the tax saving in 2020 by the present value factor of 0.9524, which gives us $7,200 * 0.9524 = $6,857.28. The difference between the two tax savings, without considering the time value, is $10,500 - $7,200 = $3,300. However, accounting for the present value, the actual saving in 2019 is $10,500 - $6,857.28 = $3,642.72, rounded to the nearest dollar gives us $3,643.