Question

Aharon and Patricia plan to file jointly and they currently project a taxable income of $142,250. They are in the middle of the 22% tax bracket. They donate a lot of their money to charity so they itemize their deductions, and this year they are thinking of donating $2000 to a new charitable organization with 501c3 status.

a. How much will the donation lower the amount of taxes they have to pay?

b. Considering that their taxes will be reduced, how much will the donation cost them out of pocket?

c. This year Patricia gave birth to a child, so they qualify for the $2000 child tax credit. How much will this save them on their taxes?

Answer 1

a) The donation to a charitable organisation with 501C (3) status is qualified for 100% tax deduction. Tax deduction reduces the gross taxable income. Aharon and Patricia file income taxes jointly. They have taxable income of $142,250 and they comes in the middle of the 22% tax bracket so if 2000 will be deducted from this taxable income, they will still come under 22% tax bracket (22% tax bracket for joint taxpayer starts from $80,250).

so, the donation of 2000 will lower their taxes by 22% of 2000 i.e $440

b) They are donating $2000 and their taxes will be reduced by $440.

Therefore,the donation cost them out of pocket will be 2000-440= $1560

c) They are qualified for the child tax credit of $2000. Tax credit directly reduce the amount of taxes owed by a taxpayer. So, the saving in taxes will be $2000.