Question

Tyler has itemized deductions greater than $12,400 for 2020, which is enough to itemize. His effective tax rate is 16% and his marginal tax rate is 24%. If Tyler accelerates an anticipated charitable contribution of $3,000 by paying it December 31, 2020, rather than February 1, 2021, he will be able to claim the standard deduction in 2021 because his other itemized deductions in 2021 are estimated to be $10,000.

1. Is this a good idea?
2. What is Larry's after-tax gain by doing this? Explain. Calculations are appreciated.

Answer 1

This is a good idea because Larry will be able to benefit from a higher tax deduction this year.

If Larry anticipates his charitable contribution, he will be able to lower his current tax liability by $3,000 x 24% = $720

Next year, Larry will probably choose the standard deduction of $12,400 since his other itemized deductions are not as high as this year's. Since he will choose the standard deduction next year, Larry will not benefit from the charitable contribution. If he does not make the contribution this year, he will actually lose the $720 deduction.