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.

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. 

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.

 


To have your question featured, please leave a comment below.

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.

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 regarding your situation, please consult your local tax advisor.

Do I Pay Tax on the Sale of My Car?

Normally, when you sell a car it will be sold for significantly less than what you paid for it. This is especially true if you bought a newer car and sold it a few years later, given that newer cars depreciate rapidly.

However, when you buy an older car and fix it up with improvements, you may sell it for more than what you had originally bought it for. In this case, the IRS considers the result of this transaction a capital gain. And, unfortunately, capital gains are taxable.

For example, if you buy a car for $2,000, and then turn around and sell it for $5,000, the difference between the two amounts will be taxed at capital gains tax rates. In this case, that amount is $3,000.

However, if improvements (not repairs for normal maintenance) have been added to the car, then the dollar amounts of the improvements are added to the car’s basis (the dollar amount that it cost you to acquire the vehicle).

An example of an improvement would be anything new that is added to the car to increase its value instead of helping to keep it maintained like patching a crack in a windshield. This could be new tires, a new engine, etc.

If, after factoring in improvements, the sale of the vehicle is still showing a gain, the taxpayer will be required to report it on their tax return and pay tax on the gain.

Although the gain on the sale is taxable, that does not necessarily mean that you can deduct a loss. For business-use vehicles, the loss on the sale of a vehicle can be deducted against business income. However, for personal-use vehicles, you may not deduct the loss against your other income.

The good news is that capital gains tax rates are more favorable than ordinary income tax rates. Depending on your income, your capital gains tax rate will be one of the following: 0, 15, or 20%.

 


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

I Sold My Home. Do I Have to Report it on My Tax Return?

So you sold your home and you’re wondering whether you have to report it, whether it’s taxable, and, if it was sold at a loss, if you can deduct it against your other income?

It’s best to start at the first part of the question: Do I have to report the sale of my home on my tax return?

When you sell your home, the lending company or title company will generally issue a 1099-S. This form reports the gross proceeds from the sale of the home to the seller. This form is issued to the seller as well as to the IRS. Therefore, they will know how much money you received from the sale of your home.

Generally, if you receive a 1099-S, you must report the sale of your home on your tax return. If you do not receive a 1099-S and you meet all of the tests to have the home considered your main home, you generally do not have to report the sale on your return.

However, just because you don’t have to report it doesn’t meet it might not be a good idea to do so anyway. Reporting it on your tax return and showing why the sale is excludable may be your best bet in the event of an audit. Otherwise, you may have to go back through your records and prove that the gain on the sale is excludable in a year that has long since been forgotten.

To prove that a home is your main home you must meet a few tests. The most important test is determining that you or your spouse owned and used the house for at 2 years out of the last 5 years. Not surprisingly, the name of this test is the Ownership and Use Test.

In order to meet the ownership test, you or your spouse must be considered the owner for at least two years out of the last five years from the date of the sale.

To meet the use part of the test, you or your spouse must have lived in the house as your main home for at least two out of the five years from the date of the sale.

So Is the Gain on My Home Taxable?

Again, if you meet the ownership and use tests, you may be required to report the sale. However, you can exclude up to $250,000 if you’re single or up to $500,000 if you’re married, of gain on the sale of the home.

Can I Deduct the Loss on the Sale of My Home Against My Other Income?

Unfortunately, where the government gives with one hand, they take away with the other. Just as the gain on the sale of your main home is not taxable, the loss on the sale is not deductible.


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