A taxpayer in the 40 percent tax bracket makes a charitable contribution of 100,000 to a not-for-profit hospital. How much does the tax bill decrease as a result?

• A. 40,000
• B. 60,000
• C. 10,000
• D. 0

Answer: (A)

When a taxpayer donates to a qualified charity, the donation reduces taxable income, and the tax saved is based on the marginal tax rate. Here, being in the 40% bracket means each dollar of deductible charitable gift lowers tax by 40 cents. A 100,000 donation reduces taxable income by 100,000 (assuming the deduction is allowed within AGI limits and the taxpayer itemizes). The tax bill then decreases by 0.40 × 100,000 = 40,000. If the deduction isn’t itemized or is limited by AGI rules, the benefit would be less or none, but under the given assumptions the reduction is 40,000.