Trevor is a single individual who is a cash method, calendar-year taxpayer. For each of the next two years (year 1 and year 2), Trevor expects to report AGI of $80,000, contribute $3,500 to charity, and pay $2,500 in state income taxes.
a. Estimate Trevor's taxable income for year 1 and year 2 using 2014 amounts for the standard deduction and personal exemption for both years.
b. Now assume that Trevor combines his anticipated charitable contributions for the next two years and makes the combined contribution in December of year 1. Estimate Trevor's taxable income for each of the next two years using the 2014 amounts for the standard deduction and personal exemption. Reconcile the total taxable income to your solution to a. above.
c. Trevor plans to purchase a residence next year, and he estimates that property taxes and residential interest will each cost $4,000 annually ($8,000 in total annually). Estimate Trevor's taxable income for each of the next two years (year 1 and year 2) using the 2014 amounts for the standard deduction and personal exemption and also assuming Trevor makes the charitable contribution of $3,500 and state tax payments of $2,500 in each year.
d. Assume that Trevor makes the charitable contribution for year 2 and pays the real estate taxes for year 2 in December of year 1. Estimate Trevor's taxable income for year 1 and year 2 using the 2014 amounts for the standard deduction and personal exemption. Reconcile the total taxable income to your solution to c. above.
e. Explain the conditions in which the bunching strategy in part d. will generate tax savings for Trevor.