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?
.48 * 500000 = X
2000000-X= Taxable income for 2008
3810000
To determine the impact of the contribution on the Wealthys' 2008 tax bill, we need to understand how tax deductions work and the formula for calculating the tax bill.
When individuals make charitable contributions, such as donating to a hospital or any other qualifying organization, they may be eligible for tax deductions. These deductions reduce their taxable income, resulting in a lower tax bill.
The formula to calculate the Wealthys' taxable income and tax bill is as follows:
Taxable Income = Total Income - Deductions
Tax Bill = Taxable Income * Tax Rate
In this case, we know the Wealthys' taxable income without the contribution. It is $2 million.
To determine the impact of the contribution on their tax bill, we need to calculate their taxable income considering the $500,000 contribution.
Taxable Income (with the contribution) = $2 million - $500,000
= $1.5 million
Now that we know the Wealthys' taxable income with the contribution, we can calculate their tax bill using the 48 percent tax bracket.
Tax Bill (with the contribution) = Taxable Income (with the contribution) * Tax Rate
= $1.5 million * 48%
= $720,000
Therefore, the impact of the $500,000 contribution on the Wealthys' 2008 tax bill is a tax reduction of $720,000.