How much will state tax liabilities of each change

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A Midwestern state aids its institutions of higher education by giving a credit against its income tax equal to 50 percent of any gift to such institutions (subject to a limit of $50 credit per person). Two residents of that state, Mr. Blue (in the 15% federal tax bracket) and Ms. Jones (in the 35% federal tax bracket) each contribute $100 to an eligible state university.
a. How much will state tax liabilities of each change as a result of their gifts?
b. State income tax payments and contributions to charitable organizations (such as universities) are both currently deductible from the base used to compute federal tax liability. How much will federal tax liability change for Mr. Blue and Ms. Jones as a result of their contribution?
c. Considering both changes in federal and state tax liability, what is the net after-tax cost of Mr. Blue's and Ms. Jones's gift?
d. Suppose the state program changed from a credit to a deduction. If the state tax rate were a flat 3%, how much would state liability for Mr. Blue and Ms. Jones change?

Reference no: EM13674100

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