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

 


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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.

 


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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.

 


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

Can I Reimburse My Employees Tax-Free?

Do your employees use their own vehicle for work, pay for food, travel, or maybe buy office supplies out of pocket? Have you been reimbursing them without knowing the rules regarding reimbursements and the many taxes that pay is generally subject to?

It’s a common problem for employers when they’re unaware of how to reimburse employees, but would still like to, especially knowing how important it is to the employee. 

The good news is is that most reimbursements for employees are completely tax-free*. 

And we’re assuming you saw that asterisk above so you know that’s not the full story. 

*If you want to reimburse your employees tax-free, the IRS will expect you to have what is known as an accountable plan in place.

An accountable plan may sound overwhelming to implement, but in practice is quite easy. Substantiation for employee business expenses generally only requires a log of receipts and purpose of the expense. 

In addition to this, reimbursements cannot exceed certain IRS rates. For example, when an employee uses their own vehicle for a work trip, you may reimburse them for mileage tax-free up to the pre-determined IRS rate. 

This is done specifically so that employers and their accountants don’t get too creative and come up with ways to pay an excessive amount to employees tax-free.

Other rules are in place for general travel and meals, like per-diem (per day) rates. 

In addition to being free from federal income tax, these reimbursements are free from Medicare, Social Security, FUTA, SUTA, and state income taxes.

If an accountable plan is not in place, you may still reimburse your employees, but with a major catch being that the reimbursements are not tax-advantaged like under an accountable plan. 

With the Tax Cuts and Jobs Act eliminating the itemized deductions with the 2% limitation (meaning employee business expenses are no longer deductible), now is the perfect time to talk to your accountant about putting into place an accountable plan. 

Being unable to be reimbursed for out-of-pocket expenses has been known to be enough to make a good employee look elsewhere.

 


Thank you for reading. This article is meant as general guidance but should not be interpreted to constitute tax or legal advice. 

Is the Interest from my Bank Taxable?

We often overlook some of our sources of income, especially if they seem insignificant compared to other sources, such as a primary job or business.

One source of income we often overlook is interest from our bank accounts or brokerage accounts held at various financial institutions.

Robert asks, “Hey Mike, hope you’re able to answer this for me. I didn’t receive any statements for the interest I received from my bank account in 2018. Is that because I don’t have to report it? This got me wondering if interest is even taxable at all. Thanks in advance.”

Robert, you likely did not receive an interest statement from your bank because it was less than $10. If you receive less than $10 in interest in a year from a single account at a financial institution, the financial institution is not required to report the interest to you in a tax statement.

The tax statement you would be looking for is called a 1099-INT. Again, in this case you would not receive one. However, just because the bank does not have to report the interest to you does not mean you do not have to report it on your tax return.

Unless the interest is from a tax-exempt source (e.g. municipal bond interest or tax-deferred or tax-free interest in an IRA), you must report and pay tax on the interest on your tax return.

It is taxable as ordinary income at ordinary income tax rates. 

If you did not receive a tax statement for your interest and would still like to stay compliant, the best way to make sure your interest is accurate is to compile all monthly statements from each bank account and add them up separately for each account. 

Round to the nearest dollar each account and report the interest on your tax return. If your combined interest is greater than $1,500 you must report it on Schedule B of Form 1040. If less than $1,500, you may report it on the applicable line of Form 1040 alone and not on Schedule B. 

I hope this overview was helpful, Robert, and thank you for writing in.

 


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This article is not to be considered tax, financial, or legal advice. For help regarding your specific situation, please consult your local advisor.

What are the IRA Contribution Limits for 2019 and 2020?

There are some stark differences between Roth IRAs, Traditional IRA, and other retirement plans, like workplace 401(k)s. Some of those differences come about through contribution limits, ages where you must draw RMDs (Required Minimum Distributions), and the age you are no longer allowed to make contributions to your account. 

Ronald asks, “Mike, hope you’re doing well. I had a quick question about my Traditional IRA and what age I can no longer make contributions to it and how much I can currently contribute to it. I’m trying to make up for lost time because I just recently got a good job and I never really made contributions before.

I’m currently 53 years old and I plan on retiring between ages 62-65. Thanks for any answers you can give me.”

Ronald, thank you for writing. Some background for anyone wondering; a Traditional IRA allows pre-tax contributions (you get a tax deduction for contributing to one).

Because of this, Congress and the IRS put limitations on how much you can contribute, how much can be deducted from your other income for tax purposes, and other restrictions. 

For starters, your Traditional IRA has a contribution limit of $6,000 for tax years 2019 and 2020. However, anyone age 50 and older is allowed a “catch-up” contribution of $1,000, meaning you have a contribution limit allowed of $7,000.

It should be noted that Roth IRAs have the same contribution limits as Traditional IRAs, however they grow tax-free instead of the contributions being deductible.

Make sure you sit down with an advisor, Ronald, and discuss your retirement options. You should look at how much you need to save into your Traditional IRA, 401(k), and any other non-qualified accounts to reach your retirement goals. 

You need to see tax consequences for different scenarios, especially if you plan on starting to draw Social Security at age 62 as opposed to putting it off longer.

 


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This article is not intended to be financial, legal, or tax advice. For help regarding your specific situation, please consult a local advisor.

Can I Still Deduct My Union Dues for Taxes?

Unions are a part of the work infrastructure in America, so naturally they had to be weaved into the tax code somehow. 

Mark asks, “Hey Mike, hoping you could answer my question about my union dues. I work for one of the Big 3 in Michigan, so we pay quite a bit of money to the union. 

I always gave my union dues information to my CPA. I was reading that they aren’t deductible anymore. Could you help explain that to me? Thanks.”

Thanks for writing, Mark. Yes, you have always been able to deduct your dues in the past. However, because of the passing of the Tax Cuts and Jobs Act, union dues are no longer

The deduction for dues, as well as all other unreimbursed employee business expenses, have been suspended until 2025. 

These dues and other expenses were subject to what is known as a 2% floor, meaning that combined they had to be over 2% of your AGI (gross income) in order to be deductible. Anything over that threshold would be deductible. 

Now, just because they are suspended for 2018-2025 does not mean that you cannot deduct them in earlier years that they apply to if you have either not filed earlier year returns or are filing an amended return.

 


To have your question featured, leave a comment below. 

This article is not intended to be financial, tax, or legal advice. For help regarding your specific situation, please consult a local advisor.

“Can I Deduct Mileage as an Employee on my Taxes?”

A lot of employees that normally have to drive a lot for work will track their mileage and then claim the mileage as a deduction on their tax return, much like a self-employed taxpayer would. 

That being said, this last tax season saw a lot of changes being implemented by the Tax Cuts and Jobs Act, and a big change impacted how we record mileage for employees.

Brian writes: “Hi Mike, I work for a construction company and have to drive a lot for work. I use my own car and pick up supplies and go to different sites. I always give my CPA my mileage at the end of the year. Not sure what he did with it but he said he won’t need it this year. 

Does he know what he’s doing? I’ve been tracking it all year and I kind of want to use it if I can.”

Thanks for writing, Brian. Your CPA is right, he will not need your mileage this year. Unfortunately, one of the big changes from the Tax Cuts and Jobs Act was the suspension of writing off any deductions that were subject to the 2% of AGI floor. All that means is that any deductions that an employee would normally deduct are now suspended, including mileage.

Now, this does not mean that all hope is lost for employees that have to use their own car for work. But it may take some negotiating skills.

Your best bet is to talk to your employer about an accountable plan. These are very powerful tools for employers to use and are tax-advantaged. An accountable plan allows an employee to turn in an expense report to his or her employer with details of the expenses and then the employer can reimburse the employee, tax-free. 

Accountable plans are non-taxable fringe benefits when used appropriately. For 2019, the IRS business mileage rate is 58 cents, meaning your employer can reimburse you 58 cents a mile, completely tax-free.

Now comes the negotiating part. Just because the benefit is tax-free does not mean your employer will want to implement it. If you have other co-workers that are affected by this, talk to them about it and approach your employer together. Perhaps bring an accountant with you to explain the benefits. 

Hope this helps, Brian, and thank you for taking your time to write in.

 


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This article is not intended to legal, financial, or tax advice. For help regarding your specific situation, please consult a local advisor and thank you for reading.

“What Are the New Rules for IRAs in 2019?”

You know the routine; you make money, you save money. And so many of us are using tax-advantaged vehicles like Traditional IRAs and Roth IRAs in addition to your workplace retirement plans. 

It’s great that there’s vehicles that incentivize retirement savings, but just know what the government gives with one hand, they take with the other, as we’ll be diving in and exploring here.

Brett writes in: “Hi Mike, thank you for what you do. I’m sure you’ve been reading the news about the IRA rules and I was wondering if you could explain to me what is happening and if this will affect the money I have in my Roth IRA. Thanks!”

Great question, Brett. Nothing has been put into place yet, although these new bills regarding Traditional IRAs seem likely to pass. As it is, if anyone other than a spouse inherits a Traditional IRA, they must take distributions from it, but they can stretch the payments over their lifetime using the IRS’ actuary tables. This is termed a ‘stretch IRA.’

Under the proposed rules, if this same event were to happen, the beneficiary would be forced to liquidate the IRA over a period of 10 years instead of their lifetime, greatly increasing the tax burden of every payment and possibly pushing the beneficiary into a higher tax bracket until the IRA is liquidated.

Another proposal is to increase the RMD age (the age where you are required to take Required Minimum Distributions) from 70 ½ to 72. This proposal is actually more beneficial to the taxpayer than the current rules. Again, where the government gives with one hand, they take with the other. 

Now, Brett, this information is important to people with Traditional IRAs. You, however, have a Roth IRA and have already paid taxes on it when you put money into it, so the government is less concerned with regulations on the back-end. 

Required Minimum Distributions do not apply to Roth IRAs, however, beneficiaries are required to take a minimum amount every year, so the new rules regarding stretch IRAs may apply to Roth IRAs as well. We will just have to wait and see for that.

I hope that clears that up a little bit and thank you for writing in, Brett.

 


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This article is not intended to be legal, tax, or financial advice. For help regarding your specific situation, please consult a local advisor.