Can I Still Deduct Charitable Contributions for Taxes?

Nothing feels better than helping others, so much so that many people willingly give their money to organizations and people that are needy. To both incentivize and reward people for doing so, the government decided that it would give a tax break for doing so many, many years ago.

Many people make use of this tax break every year by itemizing their deductions on Schedule A of their personal tax return. We often get letters and questions regarding whether someone can still take their charitable contributions on their tax return after 2017’s tax overhaul.

The simple answer is yes, you can still deduct your charitable contributions against your income for a tax benefit. Whether doing so is beneficial for the average lower-to-middle class couple is a little tougher to pinpoint. 

The question for most people now is not whether they can take their deductions, but whether they should. You see, you are allowed to take the higher or your standard deduction or the total of your itemized deductions, which include things like medical expenses, mortgage interest, state and local taxes, and of course, charitable contributions. 

The standard deduction has nearly doubled to $12,000 for a single person and $24,000 for a married couple (these amounts increased in 2019 slightly and will likely continue to increase with inflation every year).

The average person or couple will find it difficult to spend enough to come close to these amounts, choosing to take the simpler standard deduction instead of adding up their receipts for charity and medical expenses.

In doing so, life is much simpler for the average person come tax time. However, it should be noted that charities were afraid that this would negatively affect giving and have strongly lobbied against this change in our tax code.

In most studies since the tax changes, data have shown that Americans are giving significantly less than previous years, indicating that the deductibility of charitable expenses was a big incentive for the ordinary American.

But what do you think? Would you rather see filing taxes become an easier process for the average American or the charitable contributions to your favorite organizations increase?

Leave a comment below and let us know.

 


Thank you for reading. This article should not constitute legal or tax advice. For help regarding your specific situation, please consult a local advisor.

Is Value Investing Still Relevant?

When we look at what kinds of companies to invest in, we all have different ideas in mind on what makes a company worthy of receiving our money. 

We might look at things like profitability metrics, whether or not the company has strong leadership, or perhaps we care about whether the company shows any kind of social consciousness. 

No matter what we look for in a company to invest in, we want to make sure we are getting good “value” for our money. 

Robert writes in, “Mike, thanks for the insight as always. After reading the headlines the past few weeks, and seeing how the market acts, it makes me wonder if trying to find a good value stock is worth it, or if I should just buy the S&P 500 indexes and let it ride. Hope you can give some good pointers here. Thanks.”

No matter what we are buying, we are making sure we are trying to get “value” for our money. Even if you are buying the S&P 500 index funds, you are still trying to buy value and hoping you will get more money than you started with. The only difference in classic value investing is how you go about doing it.

In classic value investing, you are trying to put a price tag on what a company is worth based on different things, like annual cash flow or book value. From there, you compare the price that you believe a company is worth to the price that it is currently trading at. 

If you can buy the company for less than what it is trading at, then you are receiving it at a good value, in theory.

The idea of value investing has a few celebrities that champion it, most famously Warren Buffet. He has become famous for making a lot of money using theories taught by his teachers, Benjamin Graham and David Dodd.

Some of these theories include things we have mentioned, like cash flow analysis, and also analyzing the margin of safety of your investment.  Essentially, you want your potential investment to be so undervalued by your analysis that if you are wrong, it will lessen the blow.

Now, you might be wondering how one might value a company based on its cash flow, book value, or profitability. We will dive into this question in future posts as part of our “How to Price Stocks” series.

For questions on this topic, please leave a comment below.



Thank you for reading. This article should not constitute legal advice. For help regarding your specific situation, please consult a local advisor.

I Just Formed a Partnership. What Does it Mean for Taxes?

Most of us have entrepreneurial thoughts at some point in our lives. Some of us even act on those thoughts and pursue our dreams. While doing so, there’s plenty to think about, depending on the type of business, like inventory, customers, and business processes. 

Most of those starting out don’t think of other implications, like taxes, until they become relevant. And the relevance of taxes to a small business comes into play generally sometime between December 31st and April 15th.

Jonathan writes in, “Hey Mike, my brother and I just started a business together in May of last year. Do we just report our income on our own separate returns and take the expenses that each of us paid for or how does that work? Any insight would be incredibly helpful. Thanks!”

Great question, Jonathan, and truly, congratulations on going after your business idea. 

Unfortunately, things will likely only get more complicated from here because any time there is more than one person involved in ownership of a business, filing only your personal income tax return to report the income is generally not an option.

Since this is your brother, and if this venture was started together with the idea of sharing ownership in a business for each other’s skills and not just a way to split expenses, then you will need to file a Form 1065 U.S. Return of Partnership Income

The reason you have to do this is, well you guessed it, you’re in a partnership! The way the income and expenses are split up depends on how the agreement between the two of you was thought up.

If the agreement is for 50/50 ownership, then you each get to claim half of the expenses and half of the income on your personal return.

But all of that information will flow from the Form 1065 to the K-1’s that will get reported on your personal returns. 

Now, you might be wondering why the other partner gets to claim half of the expenses if only one partner paid the expenses. The reason is simple: the partner that paid the expenses actually invested the money into the partnership first (which increased his/her basis in the business), and then the partnership itself incurred the expense.

Unfortunately, we won’t be able to go into all the intricacies of a partnership tax return in this single article, but for more in-depth questions about the taxation of partnerships, please feel free to ask in a comment below.

 


Thank you for reading. This information should not be used to constitute legal or tax advice. For more personalized discussion, please leave a comment below.

Who Qualifies Me for Head of Household on My Taxes?

Do you pay for more than half of the costs of keeping up your home?

Are you unmarried?

Do you have someone else living with you that you care for?

Well, you’re in luck! Congress decided you need a break. A tax break, that is! You may qualify for a beneficial filing status, called Head of Household.

But not so fast!

Just because you meet these criteria, does not mean that there are no more criteria that you must meet. 

For a person that lives with you to qualify you for the Head of Household filing status, they must be related to you in a way that is closer than a cousin is related to you.

For example, the person can be your parent, sibling, child, or a descendant of any of these. In-laws count also in this case. Even ex-in-laws! That’s right, if you divorce your spouse and are still taking care of one of their family members, you may still claim them as your qualifying person for the purposes of Head of Household filing status. 

Further, you can claim a person that meets these criteria for the Head of Household filing status, even if you cannot claim them as your dependent. There is a special spot on the Form 1040 that you can put this person’s name in case they do not show up elsewhere on the return as a dependent. 

Nonetheless, most dependents will qualify you for the Head of Household filing status.

However, if you can claim someone as a dependent that meets the Member of Household test, and that is the only reason they qualify as your dependent, then you may not use them as your qualifying person for the Head of Household status. 

For more information, please click here


Thank you for reading. This article should not be regarded as legal advice. For information on your specific situation, please consult a local professional. 

If you are a tax or financial professional, hang around awhile. Feel free to leave a message. We’d love to hear from you and chat. Thanks!

Is My Scholarship Taxable?

One of the benefits of being a good student in high school (or filling out many different forms from many different organizations and attempting to make up for not being a great student) is earning a scholarship and having some of your tuition and books paid for. 

 

What is a Scholarship?

 

For those unaware, a scholarship is generally awarded by an organization (usually a non-profit) to a student for outstanding grades, athletic ability, or some other attribute of the student. It is generally monetary and must be used toward school tuition or necessary supplies for classes.

 

Scholarships generally are tax-favored for those receiving them.

 

Great, so my Scholarship is Tax-Free?

 

Possibly. Obviously nothing is quite that black and white with taxes. For the portion of your scholarship that does not exceed your education expenses and does not represent wages that were earned for the scholarship, yes it is tax-free.

 

If the organization did not specify that your scholarship must be used for education expenses, part or all of the scholarship is generally going to be taxable.

 

If any of the scholarship represents wages that were earned, then the organization will report those wages on a Form W-2 and you must report this income on line 1 of Form 1040 (your personal income tax return).

 

Can I use my Scholarships toward education credits? 

 

When it comes to the tax education credits and benefits, you generally can’t double dip. If your tax-free scholarship covered some or all of your education expenses, you cannot use those same expenses toward the American Opportunity Tax Credit, Lifetime Learning credit, or any other credit or deduction.

 

However, if your scholarship is not tax-free, it generally would be wages or other earned income, meaning there is no tax advantage to them. Since they’re not already tax-advantaged, you can use the education expenses paid for by the scholarship to claim an education credit.

 


This article does not constitute legal, financial, or tax advice. For help retarding your situation, please consult your local tax advisor.

I Started a Business With My Spouse. Do We Have to File a Tax Return?

There’s a million things to consider when first starting a business, and unfortunately many of those items revolve around tax and tax reporting. In addition to federal filing and paying requirements, you may also have state and local reporting requirements.

If you’ve just recently started a business with your spouse, you know you and your new business partner have a lot to do. And filing a tax return is one of those things.

Your spouse and you will likely be required to file a Form 1065 Partnership Information Return. This information return is purely to report the income and expenses of the business. After these items are reported on the Partnership return, the net income and other items (such as Health Insurance paid on behalf of the partners) are reported on Schedules K-1. 

Think of Schedules K-1 like a W-2 for a wage earner. The net income is essentially the wages that would have been paid to an employee. However, tax likely was not withheld from this income. Also, the income reported to each partner is distributed based on percentage of ownership in the business. 

If no other percentage is specified, it is generally assumed that each owner has equal percentage ownership (for spouses, 50% each). 

It should be noted that Form 1065 and Schedules K-1 are considerably more difficult to fill out than a Schedule C attachment on a normal tax return for a sole proprietor.

Because of this, the IRS allows a special rule for married couples starting a new business. If you are what is considered a Qualified Joint Venture, you and your spouse can elect to file two separate Schedules C (each reporting equal amounts of revenues and expenses) and attach them to your tax return.

In order to make this election, you must not be recognized as a state organized entity (like an LLC). 

The rules are set up this way specifically to give both spouses credit for Social Security and Medicare earnings under their Social Security Numbers.

 


This article is not meant to constitute tax or legal advice. For help regarding your situation, please consult a local professional.

Do I Report Income From My Garage Sale?

We get a lot of questions regarding what transactions are taxable and what which are not, especially in regards to sales of various items and at various prices. 

Most of us know that when we sell capital assets like stocks and bonds, it creates a taxable event. There are special rules for these scenarios and many other common events; one of those common scenarios is having a garage sale.

When you sell any of your old household items, shouldn’t it make sense that the money you receive from the sale would also create a taxable event?

If you had followed the rules perfectly, you would have tracked your basis (original cost of each item) in all of these items that you’ve sold, so that you would know if you had a gain or loss on every item.

So do you get to deduct your losses? After all, surely you spent way more on these things than you ever would have sold them for!

Unfortunately, personal items do not qualify for a deduction against your other income when you sell them at a loss.

But that certainly will not stop the government from taking its cut when you sell personal items at a profit. 

If you by some miracle are able to sell any of your old items at a profit, this does create a taxable event.

These items are considered personal-use property, so they are considered capital assets and any gains on them are to be reported on Schedule D (Capital Gains and Losses) as a capital gain. 

If this is an event that does apply to you, make sure to consult the IRS publications for help. The taxable amount will be the sales price minus the original purchase price and minus any improvements made to the property.

 


This article is meant to be generalized guidance and does not constitute legal or tax advice. For help regarding your specific situation, please consult a local professional.

“What Are the Child Tax Credit Tests?”

Many of the questions we receive revolve around the Child Tax Credit, as it is one of the most popular and common tax credits. In addition, it can add to quite a sizable reduction in tax liability, especially for families with more children. 

Mark writes to us: “Hi Mike, first time writing in but love all the advice as well as the technical knowledge you provide here. 

I have three kids and this year I’m planning on handling my own taxes as I am unhappy with my tax preparer. I was hoping you could go over the rules for the Child Tax Credit, as I have already determined they are my dependents using the tests you have shown previously.”

That’s a great question, Mark, and something we’ve been meaning to tackle. 

First, the income requirements for the Child Tax Credit for a single person is $200,000 gross income (MAGI for those tax professionals out there) or under ($400,000 for married filing jointly).

The credit phases out $50 for every $1,000 of gross income over these limits.

Also notable, your income must be over $2,500 to claim the Child Tax Credit.

If you meet the income requirements, you’re well on your way to receiving the Child Tax Credit. However you must also meet the following tests for each child:

  1. The child must be a US citizen, national, or resident alien
  2. The child must have lived with you for over half of the tax year
  3. The child must have been under age 17 at the end of the tax year
  4. The child must not have filed a joint tax return for the tax year (unless they didn’t have a filing requirement and file anyway)
  5. The child must not have provided over half of his or her own support for the tax year
  6. The child must be claimed on your tax return 
  7. The child must be related to you in one of the following ways: your son, daughter, stepchild, foster child, sibling, step-sibling, half-sibling, or a descendant of any of the above

 


To have your question featured, leave a comment below. 

This article should not be considered tax or legal advice. Always consult a professional for your specific situation.

“How Much is the Child Tax Credit Worth?”

Having children can be a blessing in many, many regards. And of course it can be a curse in others. Our government acknowledged the virtue of raising children and the burden it can bear on the parents.

Because of this, they enacted a credit many years ago for personal income taxes for every qualifying child a taxpayer has.

Manny writes in: “Mike, I hear there a lot of changes this year for the Child Tax Credit and I want to make sure I’m not getting screwed over by the changes. I have three kids and have always benefited from the credit and the exemptions. Any help you can give is appreciated. Thanks.”

Thank you for writing in, Manny. The Child Tax Credit is one of the more popular tax credits we write about because of how many people it affects. We’ll start with the general eligibility requirements and then talk more specifically about the phaseouts and limitations.

In order to claim the Child Tax Credit, you must have a child that qualifies as your dependent and is also under the age of 17 at the end of the tax year. 

This is important and should not be confused with the tests for a qualifying child for a dependency, which the general rule for that is under age 19, not 17.

Now for the phaseout ranges: under the new rules, the phaseout for single folk is $200,000 MAGI ($400,000 MAGI for married filing jointly). 

The credit phases out $50 for every $1,000 of MAGI over the threshold until the taxpayer is no longer able to benefit from it.

Because of the high MAGI limitations, most taxpayers are eligible for a sizable portion of the Child Tax Credit.

Now for how much you can get back under the new rules: the Child Tax Credit is worth up to a $2,000 reduction of tax liability for every qualifying child. 

If the amount of the credit reduces your tax liability below $0, you may also be able to claim a refundable credit known as the Additional Child Tax Credit.

 


To have your question featured, leave a comment below.

This article should not be considered legal or tax advice. Always consult a professional for your specific situation.

“Can I Still Deduct My Tax Preparation Fees?”

We’ve written about this topic previously, but are still going to cover it in-depth and from a different angle to better understand the concept of the itemized deductions subject to the 2% limit, as well as the specifics of how to it applies to your fees for tax preparation.

Maddie writes in: “Hi Mike, I have a question for you. My tax preparer has always raised her fee pretty substantially every year when I go to her and she always jokingly justified it by saying ‘well, at least it’s deductible.’ 

Is that even true and does it do anything good for me or is it really just helping her? Thanks!”

Thanks, Maddie. For starters, in years past, yes, your preparer has always been honest with you. It is a deduction against your other income on Schedule A of Form 1040.

This year (2019), however, if she tries to pull the same thing, she will not be being as honest.

The reason?

The Tax Cuts and Jobs Act took away your ability to deduct any of the previous items that were subject to the 2% of AGI floor. 

Unfortunately for those paying high fees (and those charging them), there is now less incentive to have someone else prepare your income taxes for a fee.

You may be wondering: “Well, my preparer tells me I have a lot of deductions every year. Which other ones are no longer deducible?”

There is a laundry list of now-non-deductible personal expenses for Schedule A.

We will only provide a small list; tax preparation fees, union dues, investment adviser fees, appraisal fees, and hobby expenses. For a longer list, click here.

The details may change in the coming years as this provision was only meant to last until 2025, at which point the old rules will apply again if the new ones are not extended.

In addition, the deductions likely to be your largest ones are still deductible, including mortgage interest and property taxes.

 


To have your question featured, leave a comment below. 

This article should not be considered tax or legal advice. Always consult a professional first.