George and Margaret Wealthy are in the 48 percent tax bracket, considering both federal and state personal taxes. Norman Briggs, the CEO of Community General Hospital, has been aggressively pursuing the couple to contribute $500,000 to the hospital's soon to be built Cancer Care Center. Without the contribution, the Wealthy's taxable income for 2008 would be $2 million. What impact would the contribution have on the Wealthy's 2008 tax bill.
To determine the impact of the contribution on the Wealthy's 2008 tax bill, we need to calculate how the donation will affect their taxable income and the corresponding tax liability.
First, let's calculate their taxable income before the contribution. The question states that without the contribution, their taxable income for 2008 would be $2 million.
Next, we need to consider the tax bracket they are in. The question mentions that George and Margaret Wealthy are in the 48 percent tax bracket, considering both federal and state personal taxes.
Since the tax bracket is given as a percentage, we can calculate the tax liability. To do this, we multiply their taxable income by the tax rate. In this case, the tax rate is 48% or 0.48.
Tax Liability = Taxable Income * Tax Rate
Tax Liability = $2,000,000 * 0.48
Tax Liability = $960,000
So, without any deductions or contributions, the Wealthy's 2008 tax bill would be $960,000.
Now let's consider the impact of the $500,000 contribution.
When individuals make charitable contributions, they can deduct the donation amount from their taxable income. This deduction reduces their overall taxable income, which in turn lowers their tax liability.
To calculate the new taxable income, we subtract the contribution amount from their initial taxable income:
New Taxable Income = Initial Taxable Income - Contribution Amount
New Taxable Income = $2,000,000 - $500,000
New Taxable Income = $1,500,000
Now we calculate the new tax liability using the same tax rate:
New Tax Liability = New Taxable Income * Tax Rate
New Tax Liability = $1,500,000 * 0.48
New Tax Liability = $720,000
So, with the $500,000 contribution, the Wealthy's 2008 tax bill would be reduced to $720,000.
Therefore, the contribution would lower the Wealthy's 2008 tax bill by $240,000 ($960,000 - $720,000).