Category Archives: Uncategorized

Deducting Charitable Contributions

As Americans, we are some of the most generous people on earth.  We give millions, if not billions, to our churches each year.  And when a tragedy occurs overseas, we will pour out even more money to help the victims get back on their feet.  In addition, our congress allocates billions more each year to maintain goodwill with other nations.

As part of preparing your tax return for the year, you can deduct some of your contributions to charity.  Let’s take a look at some of the items you can deduct for your generosity during the year.

In general, you can make contributions to the following types of qualifying organizations:

  1. Organizations that are set up exclusively for charitable, religious, scientific, educational, scientific, or literary purposes.
  2. Organizations that have a mission to prevent cruelty to animals and children.
  3. Organizations that put together amateur sports competition, either here or abroad, as long as they do not provide the facilities or equipment.

Donations to these types of organizations are tax deductible, but make sure you check with them before making a contribution to see if they can receive tax deductible contributions.  The IRS has a website set up where you can check to see if they are a qualifying organization.

So what if the organization is not based in the United States?  Can you get a tax break for donating to them?  With the exception of certain Canadian and Mexican charities, you cannot get a deduction for these types of organizations.  However, you can donate to organizations within the United States who distribute the funds gathered to foreign charities, as long as the domestic organization controls to whom the funds are distributed.

Did you donate some type of art or collectible to charity.  You want to do a couple of things if you do this.  First, get a letter from the organization stating that it intends to use the item donated in its main activity or tax exempt purpose.  If you don’t get this letter, and the organization sells the property, your donation will be limited to your basis in the property when you donate it.  Otherwise, you can deduct the fair market value of the item donated.

You probably know you can donate cash to these organizations.  And you know that you can donate property that is in good condition for the fair market value of the item at the time of the contribution.  But did you know that you can also deduct the transportation expenses you incur when doing charitable work?  The transportation costs have to be directly related to the charity work. You can deduct the cost of parking, tolls, fees, bus fare, and either the actual cost of gas and oil or the mileage times the current charitable mileage rate put out by the IRS (for 2013, it was $0.24 per mile).

If you volunteer your time with an organization, you cannot deduct the value of your time or the services provided.  Additionally, if you hire a babysitter to watch your children while you do volunteer work, you cannot deduct what you paid the babysitter.  However, if you had to purchase a special uniform that cannot be used outside of where you are volunteering; you can deduct the cost of this uniform.

Just in case you go hog wild and donate most of your possessions to charity, you will have to keep in mind that your deductions are limited.  You can only deduct up to 50% of your adjusted gross income for what you donate in cash, as well as 30% of your adjusted gross income for donations of property.  However, you are able to carryover for five years any contributions above this limit.

Now that you know what you can donate, you need to be sure that you keep good records of what you have donated.  This means that you keep a listing of any items donated, the date they were donated, and the name of the organization to which the donations were made.  Additionally, get a receipt from the organization acknowledging the donation.  A list of the cash contributions made, along with the date and organization to which the payment was made will make completing your tax forms much easier.

What experiences have you had with deducting charitable contributions on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Points On Your Tax Return

Yesterday, I wrote a post about deducting mortgage interest payments.  However, they are not the only payments related to a house that are deductible.  We’ll take a look at taxes later, but for now let’s take a look at points.

Now when I say points, I am not talking touchdowns or field goals.  Points are what you would pay to whomever you are borrowing money to buy a house to get a loan.  These could also be call loan origination fees (including VA and FHA fees), premium charges, maximum loan charges, and loan discount points.

At the beginning of a new year, you should receive a Form 1098 from the lender.  Mortgage interest would be listed in box 1 of this form, and points paid on the purchase of your main home would be included in box 2.  When you include the amount of points on your taxes, you would include these on line 12 of your Schedule A, which is used to list your itemized deductions.

Normally, if you can deduct your mortgage interest, you can deduct the points paid on your mortgage.  However, the points paid must be a form of interest.  They must also be spread over the term of your mortgage, as well as paid and deductible of the course of the term.

You may be able to deduct them in full in the year you paid them, if you meet all of the following conditions:

  1. Your loan is secured by your main home, which is the one you lived in most of the year.
  2. You used the loan to buy or build the home.
  3. The practice of paying points is an established business practice in your area.
  4. The amount you pay in points is not more than the amount charged in your area.
  5. You report income in the year you receive it and deduct expenses in the year you paid them.
  6. The points are not paid for things that are separately listed on your settlement sheet, such as appraisal fees, attorney fees, or inspection fees.
  7. You must have provided money at or before the closing on your home that were at least as much as the points charged and paid by you.  This means that you cannot have borrowed the funds from the lender to pay the points.
  8. The points were not calculated using a percentage of the loan amount.
  9. The amount of the points must be clearly stated on the settlement statement.

There are a couple of other items you may want to be on the lookout for when dealing with points.  First, if you are charged for specific services, like appraisal fees and notary fees, these items may be referred to as “points”.  You need to keep in mind that these items are not interest, and therefore not points.  You cannot deduct these.

Second, any points paid by the seller are not deductible on your tax return.  I know that sounds logical, but I have heard people saying that you could deduct these items.  Don’t fall into that trap.  However, you may be able to deduct these if you subtract them from the cost of your residence.

Third, if you paid any points on a loan that was secured by your second home, you can only deduct these over the life of the loan.

Lastly, if you paid points over and above what is normally charged in your region, you can deduct these points over the life of the mortgage.

What experiences have you had with deducting points on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Home Mortgage Interest

Owning your own home.  It’s the American dream.  You spend years trying to save up the down payment, and spend weeks looking for the perfect place to call your own.  You sign a ton of papers, and the realtor hands you the keys to your new home.

Then you see the monthly payments.  Much bigger than your car payment, right?  That’s a lot of money.  But you write a check every month so you can continue to live in your piece of the American dream.

However, there is an advantage to making these payments.  The first couple of years, most of the payment is for interest on your home loan, and this interest could be deductible.  Let’s take a look at what you need you do to be able to deduct the interest on your mortgage payments.

Since most loans occurred after October of 1987, I will focus on those in this article (interest on those loans before then are generally deductible as long as they are secured by a main or second home).  To deduct interest paid during the year, your loan must:

  1. Not exceed $1,000,000 in amount ($500,000 if you file married filing separately), and
  2. Be used to buy, build or improve the home

So when can you start deducting this interest?  Normally, it would be from the start of the loan.  However, if you have a construction loan, and the construction lasts more than 24 months, any mortgage interest after 24 months would not be deductible.  However, the interest paid on the mortgage loan when the home is complete is fully deductible.

When you close on your loan, you have to pay some closing costs.  These include things such as appraisal fees, attorney fees and lender fees.  The only items that are deductible are real estate taxes and mortgage points charged.  Additionally, if you prepay any interest at closing, you can deduct that interest as well.

Everyone tries to pay their mortgage on time.  However, you may be late on a payment or two, and be charged late fees.  These late charges are deductible as long as they are not for any specific service performed for you by the lender.

Now, let’s say you hit the lottery and want to pay off your mortgage early.  You may get hit with early payment penalties (unless you buy the bank with your lottery winnings).  You can deduct these fees as itemized deductions.

What experiences have you had with deducting mortgage interest on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Investment Interest Expenses

When did you begin to feel like a grown up?  Was it when you graduated from school?  Or perhaps when you got married?  I know the big turning point was when I started taking care of my own money.  Knowing that I was in charge of my finances not only gave me a sense of control, but a feeling that I was on my own, and the decisions I made mattered.

I made a decision to invest in my company’s 401(k) plan early on, but have not done any investing outside of that.  Maybe you have done more, possibly investing in stocks and bonds, or some interest bearing instruments.  If you have done so, did you know that you can deduct the investment interest that you pay out as an itemized deduction?  Let’s take a look at what you need to do to deduct this interest.

So what is investment interest?  This would be margin interest paid to brokers, as well as interest paid on loans used to invest in securities that bring in income.  Both of these types of interest are deductible.  However, keep in mind that the loans must be used to invest in items that will produce income, whether it is in the form of interest or dividends, or royalties.  These investments must not be in a trade or business, or in a passive activity (an activity that you don’t spend a lot of time on, such as real estate rentals and limited partnerships).  In order to prove that you had used the loan proceeds for income producing investments, you will need to keep good records.

However, there are a few things you cannot invest in with the loan proceeds and deduct the interest.  You cannot use the loan proceeds to purchase:

  • Municipal bonds,
  • Endowment contracts,
  • Annuities,
  • Single-premium life insurance policies,
  • Straddle options (where you hold a position in both a call and put option with the same strike price and expiration date).

So how do you go about deducting this interest?  The first thing you would need to do is reduce your investment income by the amount of non-interest related investment expenses that you will be deducting as miscellaneous expenses on Schedule A.  This will give you the maximum amount of investment interest expenses you can deduct this year.  Any amount you cannot deduct this year can be carried forward to next year.

Next you will need to decide if you need to complete Form 4952Investment Interest Expense Deduction.  You would need to use this form unless you meet the following criteria:

  1. You only had investment income from interest or dividends
  2. You had no other deductible expenses from the production of the interest or dividends
  3. Your investment interest is less than or equal to your total investment income
  4. You had no carryover interest deductions from prior years.

If you meet these criteria, you can just record the expenses on Schedule A.

What experiences have you had with deducting investment interest on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting State, Local and Foreign Taxes

“Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes” said Benjamin Franklin in a letter to Jean-Baptiste Leroy in 1789.  As someone who has worked with taxes for a good many years, I know from experience the myriad of taxes that hit people’s wallets, and hope that I don’t experience death for quite a while.

While just about all of us are none too fond of taxes, we do get a benefit out of paying some taxes.  Several types of state and local taxes are deductible as itemized deductions on the federal return.  Let’s take a look at a few.

The first thing to keep in mind is that in order to deduct some of these taxes, they must have been imposed on you and not someone else.  While you can be a generous person and pay someone else’s taxes, you cannot take a deduction for paying someone else’s taxes.  Additionally, the money actually has to leave your wallet, either through cash, check or credit card, in order to deduct the taxes.  Just because you got a tax bill on December 31st doesn’t mean you can deduct those taxes on your return.

So what taxes are deductible?  Mostly, state, local and foreign taxes are deductible.  These would include taxes withheld, paid for an earlier year in the current year, and estimated taxes.  The following is a listing of some of the additional types of taxes you can deduct:

  1. State, local and foreign income taxes
  2. Employee contributions to state funds listed under state benefit funds.
  3. State, local, and foreign real estate taxes.
  4. A tenant’s share of real estate taxes paid by a cooperative housing corporation.
  5. State and local personal property taxes.
  6. State and local sales taxes (provided you make an election on schedule A to claim them instead of claiming state and local income taxes).
  7. One half of your self-employment taxes that you have paid
  8. Fee and charges that are expenses of your business charged by a government entity.
  9. Taxes on property producing rent or royalty income
  10. Occupational taxes

Now, let’s say you have taxes that are going to be charged to you next year, say property taxes, and you want to prepay them this year to get the tax benefit.  The good news is that you can deduct these taxes in the year you paid them.  The bad news is that you have money going out for taxes.

What experiences have you had with deducting state, local and foreign taxes on your federal tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Medical and Dental Expenses

Everyone goes to the doctor, or should go more often.  We all get sick, and need to pay for medical and dental care throughout our life.  One of the types of costs that can be itemized are medical and dental expenses.  Let’s take a look at what types of expenses can be claimed, and by whom.

Whose expenses can you deduct

The first thing to determine is if you can claim the cost of medical expenses during the year.  You can claim them for yourself, of course, and your spouse if you are married.  Additionally, you can claim the medical expenses for your children.  You can also claim these costs for others who would be considered your dependents, unless they had gross income of $3,800 or more, or filed a joint return with their spouse.  You need to be sure that the person for whom you are claiming these costs are your dependents; otherwise your claim will be disallowed by the IRS.

Now that you know for whom you can claim expenses, let’s take a look at the types of expenses that are deductible.  You can claim unreimbursed medical expenses in the year they were paid.  If you received a bill for services from a doctor that you don’t pay until the following year, you cannot claim the cost on your taxes for the current year.  Additionally, if you were reimbursed for expenses by an insurance company or some other party, you cannot claim the amount that was reimbursed as your medical expenses.

The amount you can deduct

There has been a change in the dollar amount you can claim on your return.  It used to be that you could claim expenses that exceeded 7.5% of your adjusted gross income (AGI), but this year that threshold has been raised to 10% of AGI.  For example, let’s say your AGI is $75,000 a year and you had $7,000 in medical expenses.  Under the old rules you would be able to deduct $1,375 ($7,000 – 7.5% of $75,000, which is $5,625).  Under the new rules, since you would have needed to pay $7,500, or 10% of $75,000, you would not be able to claim any medical expenses since you only paid $5,625.

Items you can deduct (and a few you cannot)

Here is a listing of the types of expenses that are deductible:

  1. Doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners
  2. In-patient hospital care or nursing home services, including the cost of meals and lodging charged by the hospital or nursing home
  3. Acupuncture treatments
  4. Treatment at a center for alcohol or drug addiction
  5. Smoking-cessation program and for drugs to alleviate nicotine withdrawal that require a prescription
  6. Weight-loss programs for a specific disease or diseases, including obesity, diagnosed by a physician.
  7. Insulin and payments for drugs that require a prescription
  8. Admission and transportation to a medical conference relating to a chronic disease that a taxpayer, their spouse, or their dependents have
  9. False teeth
  10. Reading or prescription eyeglasses or contact lenses
  11. Hearing aids
  12. Crutches
  13. Wheelchairs
  14. Guide dogs for the blind or deaf
  15. Transportation expenses primarily for and essential to medical care that qualify as medical expenses.  This would include expenses for taxis, buses, trains, or ambulances.  Additionally, it would include expenses for a personal car used to make the trip, including the amount of your actual out-of-pocket expenses such as for gas and oil, or the amount of the standard mileage rate for medical expenses, plus the cost of tolls and parking fees

In contrast, you cannot deduct the following:

  1. Expenses paid from a medical savings account (MSA) or flexible spending account FSA
  2. Medical insurance premiums paid with pre-tax dollars
  3. Funeral or burial expenses,
  4. Over-the-counter medicines,
  5. Toothpaste, toiletries, or cosmetics,
  6. A trip or program for the general improvement of your health,
  7. Cosmetic surgery.
  8. Medicines bought without a prescription.
  9. Nicotine gum and nicotine patches, as they do not require a prescription.
  10. Diaper service

Long term care insurance

An additional type of medical expense that can be deducted is long term care insurance.  These payments are deductible, but must be due to the person who is insured inability to perform daily basic activities, such as eating, dressing and bathing due to illness, injury, or cognitive disorder.  Keep in mind that while the people that most often would use this type of care are the elderly, these expenses could also be deductible for those who are younger but are also unable to perform daily basic activities.

Home improvements

Certain medical conditions may require you to make improvements to your home to help with the care of the person who has the medical condition.  An example would be to add a ramp for someone who needs a wheelchair, or to add a pool for physical therapy.  These types of costs are tax deductible, but only to the extent the improvements increase the value of the home.  It is helpful to get a Certificate of Medical Necessity from your doctor before you start construction, as the IRS would ask to see it if the expenses are questioned.

What experiences have you had with deducting medical and dental expenses on your tax return?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deductions: What Is The Difference Between Itemized and Standard Deductions

Taxes are confusing.  You have to deal with conflicting instructions and a myriad amount of rules that need to be followed. One of the questions I get has to do with deductions.  People get confused about the difference between the standard deduction and itemized deductions.  Let’s take a look at the difference between the two types of deductions.

First off, let’s discuss what deductions represent.  These are amounts that are subtracted from your Adjusted Gross Income (or AGI) to reduce the amount of your income that is taxed.  This will ultimately reduce the amount of tax you may owe, or increase your refund that is due to you.

The standard deduction is pretty much your base deduction.  It is the very minimum in deductions you can take, and it is the easiest to determine.  However, you will not be able to take the standard deduction if any of the following are true:

  1. You are married and filing separately and your spouse itemizes deductions.   If this is the case, your deduction is $0.
  2. If you were a nonresident alien, or were both a nonresident and resident alien during the year.  This would not apply if you were married to a U.S. citizen or resident and you elected to be taxed as a resident.
  3. You are filing a tax return for a short tax year because you are changing from a calendar to a fiscal year (a year that does not begin on January first and end on December 31st.

Your standard deduction is based on your filing status, with adjustments if you are blind and or over 65.  For your 2013 tax return, the standard deductions are as follows:

  • Single – $6,100
  • Married Filing Joint – $12,200
  • Head of Household – $8,950
  • Married Filing Separate – $6,100

In contrast, itemized deductions are expense that you can report on your income tax returns that, like the standard deduction, are used to decrease your taxable income.  Unlike the standardized deduction, the limit you can claim is much higher, and is based on the IRS’s current rules for limiting itemized deductions.

There are several types of expenses that can be claimed as itemized deductions.  These would include:

  • Medical and dental expenses,
  • State, local and foreign taxes
  • Interest
  • Home mortgage interest
  • Charitable contribution
  • Casualty and theft losses
  • Job expenses
  • Certain miscellaneous deductions

I will discuss these individual items in a future post.  For now, just know that the main difference between the standard and itemized deductions is that you have a fixed amount you can claim for the standard deduction, and the itemized deductions allow you to take a deduction for the actual amount you spent for certain expenses during the year.

What experiences have you had with choosing between the itemized and standard deductions?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Tip Income: How To Report It On Your Taxes

I have a sister who used to work as a waitress.  She had a few regulars who knew her, and she took care of them.  She learned a lot about business, and was able to make a fairly decent living.  The people she waited on did tip her, and I never heard any “I got stiffed” stories.  But how did she report the tips she earned on her taxes.  Let’s take a look.

First off, tip income is taxable income.  If you received more than $20 a month in tip income, you have to report the amount you received to your employer.  These tips are included in box one of your W-2.

However, if you don’t report these tips to your employer, you still need to report this income to the IRS and pay social security and Medicare taxes on this income.  You would use Form 4137, Social Security and Medicare Tax on Unreported Tax Income to report the additional taxes.  When you use this form, you will have to use form 1040, as the additional taxes cannot be reported on forms 1040A or 1040EZ.

Keep in mind that if you don’t report your tip income to your employer, you could be liable for a penalty equal to 50% of the social security and Medicare taxes you owed on the unreported tips.

You will want to be sure to keep a record of your tips so that you don’t have to pay a large amount of tax.  A carefully kept record is a good defense if your tip income reported on your tax return is ever questioned.

If you make less than $20 a month in tips, you are exempt from social security and Medicare taxes, but you must report the tips you receive on line 7 of Forms of 1040 or 1040A, or line 1 of form 1040EZ.

A lot of times, a restaurant or bar will allocate tips earned by the staff to employees based on a predetermined formula.  These tips are reported to the employee on box 8 of Form W-2.  You will need to report this amount on your taxes unless one of the following is true:

  1. You have kept a good daily tip record
  2. If your record is incomplete, but the amount on your record is more than what your employer reports.

If either of these conditions is met, use the tip amount from your records, and do not report the allocated tips amount on your W-2.

What experiences have you had with paying taxes on tip income?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.  If you need help with other tax questions, or with preparing a return, drop me a line, and we can discuss your situation.

Deducting Medical Costs For A Parent

The great part about being a CPA is getting to help people with their tax issues.  Tax issues can be complicated, and quite stressful, so I always enjoy answering questions to relieve the stress and hopefully solve their problems.

Along those lines, I got the following question from a friend of mine:

I recently placed my Mom in assisted care and pay $3,250 a month for her care there. She gets just under $2,000 each month from her pension and Social Security, all of which is used to pay her care bill. I also add another $1,250 from my own funds to make up the difference. A few years ago, the money that I currently invest and draw dividends from for her care actually belonged to my Mom and Dad. In the past three years, however, it’s become my own because my father died in 2010 and my Mom has early dementia. Since their money is now mine for the past 3+ years, would I be able to deduct assisted care expenses on my own taxes?

There are a few questions that need to be answered before you can determine if you can deduct medical expenses for someone.  Let’s walk through them one by one.

The first question is whether the person is a qualifying child or a qualifying relative.  A qualifying relative, according to the IRS, would be someone who is your:

  1. Son, daughter, stepchild, or foster child, or a descendant of any of them (for example, your grandchild),
  2. Brother, sister, half-brother, half-sister, or a son or daughter of any of them,
  3. Father, mother, or an ancestor or sibling of either of them (for example, your grandmother, grandfather, aunt, or uncle),
  4. Stepbrother, stepsister, stepfather, stepmother, son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law, or
  5. Any other person (other than your spouse) who lived with you all year as a member of your household if your relationship did not violate local law.

In this case, since it is the taxpayer’s mother, they would qualify.  Additionally, your mother or father do not have to live with you in order to claim them as a dependent or pay for their medical expenses.

Next, you would have had to pay more than half of their support.  In this case, the total funds provided were $3,250.  The mother provided $2,000, or around 62%.  The daughter paid $1,250, or 38%.  Therefore, this taxpayer would not be able to take a deduction for their mother’s assisted care expenses.

What experiences have you had with paying for a relative’s medical expenses?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them.

Medical Reimbursements For More Than Your Expenses? What Do You Do?

There are many different ways that you can earn income, according to the IRS.  Be it through working for an employer, owning your own business, or owning stocks and bonds, all of the income from these types of activities need to be reported on your tax return.

However, one item of cash coming in may or may not be income.  This would be for medical reimbursements.  While reimbursements for medical care are not usually taxable, they could end up reducing your medical deductions on the form for itemized deductions.

So when would these reimbursements be taxable?  If you receive a reimbursement for medical expenses greater than the actual expenses you incur, the excess reimbursement may be taxable.  There is a series of steps that you would have to go through to determine if the excess reimbursement is taxable.

First, if none of your insurance premiums were paid by your employer, than none of the reimbursement is taxable.  Also, if they did pay some of the premiums, and they included these contributions in your income as stated on your W-2, none of the reimbursement is taxable.

However, if your employer did contribute to your premiums, included them in your income, and you didn’t pay any part of your premiums, the entire amount of the excess reimbursement is taxable.  If you did pay part of your premiums, part of the excess reimbursement is taxable.  The amount to include in your income is the part of the excess reimbursement that is from your employer’s contribution.

What experiences have you had with getting a medical reimbursement that was for more than your expenses?  I’d love to hear about it.  Also, if you have any questions, shoot them to me at chrispedencpa@yahoo.com, and I would be happy to answer them