Category Archives: Personal Income Tax

Charitable Deductions for Noncash Contributions

Goodwill Values Goodwill Industries has published this guide which is referenced on the IRS website as appropriate for valuing your noncash contributions of used clothing, furniture and sporting goods.

Valuing Charitable Contributions

When you contribute wearable clothing, useable household furnishings, small appliances in working order, sporting goods, and generally just about anything a CHARITABLE organization can sell in their “Resale Thrift” stores, you can deduct the “Thrift” store sales price as a noncash charitable contribution.

We usually hand out a list of suggested values provided in one of our tax reference manuals but now Goodwill of Southeastern Wisconsin has provided an excellent list of their average prices in their stores for a number of items.

http://www.goodwillsew.com/page.asp?dbID=295

If the value of your noncash donations exceeds $500 in a calendar year, you will want to print out this list FOR EACH DATE of your noncash contributions, and multiply out the number of items donated by their respective thrift store price.  That information will be needed, along with a dated receipt from the CHARITABLE organization to whom donated, in order to complete the Form 8283 on your individual income tax return.

New 3.8% “Medicare” tax on Net Investment Income for ALL Individual Taxpayers!

Effective January 1, 2013, as the law is currently written, a 3.8% Medicare tax will be imposed on all net investment income (interest, dividends, annuity income, capital gains, rents and royalties, etc.) reported on individual income tax returns.  Here is the new Section of the law recently passed as part of the health care reform:

‘‘SEC. 1411. IMPOSITION OF TAX.

‘‘(a) IN GENERAL.—Except as provided in subsection (e)—
‘‘(1) A
PPLICATION TO INDIVIDUALS.—In the case of an individual,
there is hereby imposed (in addition to any other tax
imposed by this subtitle) for each taxable year a tax equal
to 3.8 percent of the lesser of—
‘‘(A) net investment income for such taxable year, or
‘‘(B) the excess (if any) of—
‘‘(i) the modified adjusted gross income for such
taxable year, over
‘‘(ii) the threshold amount.
‘‘(b) THRESHOLD AMOUNT.—For purposes of this chapter, the
term ‘threshold amount’ means—
‘‘(1) in the case of a taxpayer making a joint return under
section 6013 or a surviving spouse (as defined in section 2(a)),
$250,000,
‘‘(2) in the case of a married taxpayer (as defined in section
7703) filing a separate return,
12 of the dollar amount determined
under paragraph (1), and
‘‘(3) in any other case, $200,000.

Now Congress might have intended this tax to apply only to high income individuals (over $250,000 married, filing jointly or over $200,000 as a single individual), but that is NOT how the law is written.

If you’re already over the $250,000, you can add this new 3.8% tax to the income taxes you’re already paying.   If you’re under the $200,000 in adjusted gross income, you might want to ask your Congressional representatives if they’re going to fix this error, which if the Internal Revenue implements literally, will make all of us pay the 3.8% on even our little savings accounts, but it will especially hit the elderly on fixed incomes who depend upon their annuities and other investments in their retirement.

Haiti Charitable Contributions P.L. 111-126

Congress has passed legislation designed to encourage charitable contributions for the relief efforts in Haiti. The President signed it into law January 22, 2010. Under the new law, taxpayers may deduct charitable contributions made for the relief of earthquake victims in Haiti on their 2009 tax return rather than wait to deduct it on their 2010 return.

Observation: The language in the law indicates this is an election and not a requirement. The election is made by simply deducting the contribution on the 2009 return.

Qualifications: The deduction is allowed on the 2009 return if all of the following conditions are met:

  • The contribution is made after January 11, 2010 and before March 1, 2010.
  • The contribution is a cash contribution. (Contributions of food and clothing are not cash contributions.)
  • The contribution is made for the relief of victims in areas affected by the earthquake in Haiti on January 12, 2010.
  • All other requirements for deducting cash contributions under Section 170 of the Internal Revenue Code are satisfied. (Example: The contribution has to be made to a qualified charitable organization.)

Recordkeeping. For purposes of the above rules, a telephone bill showing the name of the donee organization, the date of the contribution, and the amount of the contribution is treated as meeting the recordkeeping requirements of IRC Section 170(f)(17).

First-Time Homebuyer Credit 2009 New Rules

Chart. The following chart summarizes some of the first-time homebuyer credit rules based on date of purchase from the Tax Authority Update Bulletin, published by Tax Materials Inc, www.thetaxbook.com

Date of Purchase Main home purchased after 4/8/2008 and before 1/1/2009. Main home purchased after 12/31/2008 and before 11/7/2009. Main home purchased after 11/6/2009 and before 7/1/2010 (written binding contract signed before 5/1/2010), or 7/1/2011 (written binding contract signed before 5/1/2011) for qualified official extended duty service.
Date of Purchase Definition The date of purchase is the date title closes. If the taxpayer constructs the residence, the date of purchase is the date the taxpayer first occupies the residence. The date of purchase is the date title closes. If the taxpayer constructs the residence, the date of purchase is the date the taxpayer first occupies the residence. The date of purchase is the date title closes. If the taxpayer constructs the residence, the date of purchase is the date the taxpayer first occupies the residence.
Credit Amount The smaller of 10% of the purchase price or $7,500 ($3,750 MFS). The smaller of 10% of the purchase price or $8,000 ($4,000 MFS). The smaller of 10% of the purchase price or $8,000 ($4,000 MFS), or $6,500 ($3,250 MFS) for certain long-time residents (see first-time homebuyer below).
First-Time Homebuyer Must not have owned a principal residence in the U.S. during the 3-year period prior to the purchase of the home. Must not have owned a principal residence in the U.S. during the 3-year period prior to the purchase of the home. Must not have owned a principal residence in the U.S. during the 3-year period prior to the purchase of the home. A long-time resident who has maintained the same principal residence for any 5-consecutive year period during the 8-year period ending on the date of the purchase of a subsequent principal residence is treated as a first-time homebuyer.
AGI Phase-out Credit phases out when modified AGI is between $75,000 and $95,000 ($150,000 and $170,000 for MFJ). Credit phases out when modified AGI is between $75,000 and $95,000 ($150,000 and $170,000 for MFJ). Credit phases out when modified AGI is between $125,000 and $145,000 ($225,000 and $245,000 for MFJ).
Refundable? Yes Yes Yes

Mutual Funds Cost Basis and the 1099-B

Every time a dividend is reinvested in a mutual fund, you’ve just paid more for the investment.  This is because you are income taxed on that dividend income, and you have chosen to buy more of that investment with that income.  We’re talking about mutual funds OUTSIDE of any retirement accounts here.

To determine your cost basis of mutual funds that you sell, you need to add up your original investment (if buying through a brokerage firm, this will be the “BOT” statement) plus all of the dividends reinvested.  For this reason, you need to keep every year end mutual fund statement which details all of the transactions throughout each year, in order to prove your cost basis when you sell. 

Sometimes you may sell only a part of your mutual fund investment.  This is where computer spreadsheets come in handy to keep track of the AVERAGE cost per share which you may use in determining your cost basis.  Or, you can keep track of the specific shares sold, using the cost basis of the first shares purchased as the first shares sold. 

Many mutual fund companies are keeping track of your cost basis information, and these calculations are usually accurate.  I have found inaccuracies, though, which do not include all the fees or commissions paid, as included in the cost basis.  The amounts are usually minor.

When you sell mutual fund shares, you will receive a 1099-B showing the gross proceeds being reported as income to the IRS, and you will need to report your cost basis against that income on the Schedule D of your personal income tax return.

When you “exchange” one mutual fund for another, you are effectively selling shares in one fund, and purchasing them in another.  You will receive a 1099-B showing that sale being reported to the IRS.  This surprises many people because they didn’t realize they were “selling” because the money is still invested.

Gross Proceeds….1099-B

We have another year before the IRS requires brokerage firms to report your cost basis when you sell stock. 

Update March 2011:  Brokers are NOT required to report basis for any securities you’ve acquired before 2011.

In the meantime, we haven’t found too many people who understand the term “cost basis”. 

If you receive a Form 1099-B in January for the year before, it means you’ve sold an investment through a brokerage firm. 

The total sale price of the investment is reported to the IRS on Form 1099-B.

You need to report the sale on your tax return on Schedule D.  You get to subtract your cost of the investment from the gross proceeds, to determine your gain or loss on the sale.  That gain will be taxed, or your loss will be subtracted from other gains, or up to $3,000 will be subtracted from your other income on your Federal tax return.  Any losses greater than $3,000 will be carried forward to future years.

If there is ever anything missing from the tax return information we receive to prepare tax returns, it is the cost basis of the investments sold during the year! 

Remember to keep the “BOT” statements from buying your investments.  They are your best proof of your investment cost down the road when you sell those investments!