Assume that Reginald Worthington, who pays 40 percent in income taxes, plans to contribute 100,000 to not-for-profit Ravenswood Community Hospital. Without contribution, his tax bill would be 500,000. What would be his tax bill if he makes the contribution?

• A. 460,000
• B. 500,000
• C. 540,000
• D. 480,000

Answer: (A)

The amount donated reduces taxable income, and the tax savings come from applying the marginal tax rate to that deduction. With a 40% rate, a 100,000 donation lowers taxes by 100,000 × 0.40 = 40,000. Subtracting that from the baseline tax bill of 500,000 gives 460,000. So the tax bill after the contribution would be 460,000.