Archive for the ‘charitable deductions’ Tag

Back to Basics Part II – Schedule A

Originally published in the Cedar Street Times

October 31, 2014

Two weeks ago we discussed a general overview of the Form 1040 – a personal income tax return.  The 1040 can be thought of as a two-page summary of your taxes in a nutshell.  (I should mention also there are two other shorter forms that could be filed instead: a 1040A and a 1040EZ.  These are for simpler returns and have income limits and other restrictions.  In practice, however, anyone using tax software does not really have to decide which form to use and the software will generally optimize as appropriate.  For our discussion we will focus on the 1040.)

The details for many of the items on the Form 1040 are actually determined on subsequent Schedules and Forms.   Schedules are labeled with letters of the alphabet and additional forms are generally four digit numbers.  Schedules are generally more major topical areas.  For instance, Schedule C – Profit or Loss from Business, which is a summary of all the activity of a sole proprietorship.  It may in turn have subsequent forms that support it.  Forms are often more narrowly focused and would generally support other schedules or forms.  For instance Form 4572 Depreciation, could support the calculation of depreciation expense for a business on Schedule C, a rental property on Schedule E, a farm on Schedule F, etc.  I have not counted them all, but I have read the IRS has over 800 forms and schedules.  The reality is that most people are covered by 30 or 40 of those 800!

Let’s start at the beginning of the alphabet – Schedule A.  (I am sure this saddens you, but we will not be going through all 800 in this series of articles, but we will hit on a number of the most common ones!)  Schedule A is for itemized deductions.  You probably hear lots of people justify expenses by tossing around the phrase, “it’s deductible.”  However, just because something may be deductible, does not mean it will benefit you. This is easily seen with Schedule A.  Schedule A covers a host of “expenses” that most people have that our tax code has graced as good behavior and therefore allows a deduction for it.  Medical expenses, state and local taxes, real estate taxes, mortgage interest, charitable deductions, unreimbursed employee business expenses, my favorite – tax preparation fees, investment expenses, etc.

Since Congress realized that everyone had some of this, and it would be a pain for people to track it, they decided to allow as an option a “standard deduction” for everyone in lieu of tracking and itemizing all those deductions.  The standard deduction was created to generally cover what many people would have on the average anyway.  For 2014 this standard deduction is $6,200 if you file as Single or Married Filing Separate, $12,400 if you file Married Filing Jointly or Qualifying Widow(er), and $9,100 if you are filing Head of Household status.  If you believe you would have more than this, then you would itemize the deductions using Schedule A.

Mortgage interest and real estate taxes are the two areas that push most Californians into the itemizing zone.  In other words, if you do not own a home, there is a good chance you won’t be itemizing.  This is not always true: sometimes people don’t own a home, but make a lot of money and pay a lot of deductible state income taxes which would push them over the standard deduction, or maybe they work in sales jobs where they have lots of unreimbursed employee business expenses, or have major unreimbursed medical expenditures, or are perhaps like you dear reader, and have a heart of gold giving away buckets of money to charitable organizations each year!  Or it could be a combination of things – paid some income taxes, have a stingy boss that won’t reimburse, and maybe you have a heart of bronze.

Next week we will discuss more specifically the deductions on Schedule A and how they can come out looking a little thin after running the Schedule A gauntlet.

Prior articles are republished on my website at www.tlongcpa.com/blog.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.

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Lost in Transition

Originally Published in the Pacific Grove Hometown Bulletin

March 16, 2011

 

In my experience in the tax profession and from my vantage point as a Certified Public Accountant, I can tell you stories that will make your heart sing.  I can also tell you stories that will make you shudder like you just heard a bad contestant on American Idol.  The stories that make you cringe are usually caused by moments of stupidity by other tax preparers, or sadly, by people losing at a game of Tax Return Russian Roulette1.  I like to think the stories of hearts singing involve me riding in on a metaphorical white horse to save the day, heralding a banner “To correct stupidity and promote safety locks on roulette guns…”  I grant you, it is an unusual banner.

If I may spare you some pain, dear reader, I would say be mindful of transitions between tax preparers (including yourself) – particularly if you are “downgrading” the type of preparer you use.  Over the years I have seen countless returns where valuable tax attributes from prior returns were not carried forward to the next year’s returns by a new preparer (effects ranging from hundreds to several hundred thousand dollars in tax).  Some of you may be under the impression that your tax returns each year are distinct; this is rarely true.

Let us look at a simple example and suppose that you bought or inherited some mutual funds in 2007 worth $11,000; you sold them in 2009 for $6,000 resulting in a $5,000 loss.  There is a good chance you would have been limited to using $3,000 of this loss in 2009 and the other $2,000 would have been a capital loss carryover to your 2010 returns that could save you $500 or more in tax.  Of course, if you switch preparers and the new preparer does not have the training or presence of mind to find the Schedule D from 2009 and look for any unused capital losses, the cost of your new tax preparer just went up by $500.  Sadly, you probably would never know a costly mistake was made.

There are many areas similar to the above item including: carryovers of net operating losses, basis in retirement contributions and depreciable assets, state tax payments or refunds, office-in-home expenses, charitable contributions, rental property expenses (passive activity losses), alternative minimum tax (AMT) credits, foreign tax credits, general business credits, etc.  Often there are different amounts for the federal and state returns, and perhaps even AMT amounts for each of those if you are or may become subject to AMT.  Unfortunately these are scattered throughout forms in the return, and just because your new preparers show you comparative figures in a tax summary when you pick up your returns, does not mean they entered any of the carryovers in their software.

You do not have to be rich or have a complicated return to be affected by a number of these.  However, it does generally hold true, that the more money you make and the more types of activities you are involved with (rental properties, investments, etc.) the more heavily you are affected.

If you are doing the returns yourself with tax software for the first time, look carefully through the returns for hints of the above mentioned items, and be very diligent in answering the tax software questions.  Also, be wary of deleting items you think you no longer have, as they may have carryover or suspended items attached to them.  One of your big challenges is to know what the returns are supposed to look like when you are through.  If you are switching preparers, make sure the new preparer is qualified.  You may want to ask what specific carryover information was picked up from the old returns.

Let it be said of you, “You have chosen…wisely.”  I hope I do not have to saddle up my white horse on your behalf, as I still prefer a regular appointment.

Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950.  He can be reached at 831-333-1041.

 

Tax Return Russian Roulette – noun – a form of legalized gambling with generally poor odds whereby untrained participants willingly subject themselves to cruel and unusual punishment in the form of self-tax preparation, risking thousands of dollars in order to save hundreds.