 Income tax 2023-2024. Itemized deductions, gifts to charity, tax software example. Get ready and some coffee because contrary to popular belief, you need a strong imagination to do income tax preparation 2023-2024. First, a word from our sponsor. Yeah, actually, we're sponsoring ourselves on this one because apparently the merchandisers, they don't want to be seen with us. But that's okay, whatever, because our merchandise is better than their stupid stuff anyways. Like this CPA thinking cap, for example. CPA thinking CAP, you see what we did with like with the letters. And this CPA thinking cap is not just for CPAs either. Anyone can and should have at least one possibly multiple CPA thinking caps. Why? Because based on our scientific survey of five people, all of whom directly profit from the sale of these CPA thinking caps, wearing this CPA thinking cap without a doubt, according to the survey, increases accounting productivity tenfold. Yeah, at least. Apparently the hat actually channels like accounting energy from the quantum field ether directly into your head, allowing you to navigate spreadsheets faster. It's kind of like how in like the matrix when Neo learns kung fu, or at least that's what the scientific survey saying. So get one, because the scientific survey participants could really use some extra cash. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. We are in our Form 1040 example problem using LASERT tax software. You don't need tax software to follow along, but if you have access to it, it's a great tool to run scenarios with. Also get access to forms, schedules, instructions at the IRS website irs.gov, irs.gov. Starting with our taxpayer, Adam Taxman, just trying to avoid a dang tax man living in Beverly Hills 90210 single filer, no dependent starting out with W2 income, the 100,000 standard deduction, getting us to the 86, 150, the taxable income, which we can mirror in the income tax formula, 100,000, 13, 8, 50, 86, 150, the tax software calculated in the tax, 14266, which we can see on page two of the Form 1040, 14266. There's our starting point. Let's go back to page one now. We're going to be focusing in on line number 12, standard deduction or itemized deductions. Remembering we're taking the greater of the two. In order to itemize, we have to clear then the standard deduction, which is typically depend most primarily on the filing status. So we can see that on the left for single filers 13, 8, 50, double that for Mary 27, 700, in the middle for head of household 20,800. And we can see on the 1040 SR page four, if they're over the age limit and or blind, they push the standard deduction up higher for single filers, one or two conditions. Here's the standard deduction on the right, married filing joint. You can have one to four conditions because there's two people with two conditions. Here are the standard conduct deductions on the right. Let's go back to the form 1040. We're going down to line number 12. Remembering that now we're focused on the itemized deductions, which are reported on the Schedule A. So within the Schedule A, we have the list of the deductions on the left-hand side. This is of course the itemized deductions, medical taxes, interest, and so on and so forth. We're here looking at the gifts to charity. Noting that normally for lower income taxpayer, which you can often determine as by or whether they filed as an itemized deduction in the prior tax year, if they're going to itemize this year and if they're not close to itemizing, the charitable contributions are not usually the thing that pushes people over the threshold. What is the thing? Once again, it's the ownership of a home because that usually comes with a loan, which means you'll have the mortgage interest and most likely property taxes for real estate taxes. Once over that threshold, then you can tack on all the other stuff. Then all the other questions come up with regards to other categories of the itemized deductions. For example, if we were to just throw in an itemized deduction here and say charitable contributions, we'll go with the 50% limit and just say that this was at, let's just throw in like 10,000 here. 10,000. Sorry, my number lock was on. Who hit my number lock? Dang it. All right, so we go over. There's the 10,000. It's pulling down. We're at 11,217. How did I get to 11,000? Because it's adding the state taxes. I also have the points. Let's get rid of those points. That's leftover from before. So now we've got the 12,005. No points. The 10,000 gets us to the 11,205. If I go back to the form 1040 and page one, that's only at under the threshold of the 13,850. Therefore, we're still taking the standard deduction, not itemizing. Therefore, for federal income tax purposes, people that aren't itemizing, typically people that have income below a certain threshold are not likely to get the same tax benefit from the charitable contributions. Like what does that mean that lower income people shouldn't give to charity or have less benefit from giving to charity? These are kind of some of the questions that basically come up with regards to incentives on the tax code, designing the tax code so that it's not just there to try to collect revenue in as fair a way as possible to pay for the military or something, but in order to kind of nudge us and whatnot, as is the case with most of the things on the itemized deductions. What is it actually doing in terms of incentives to be putting charitable contributions on the itemized deductions and so on and so forth? So in any case, that's the deal now. If I was to go over the threshold, we can say, well, what if we owned the home? Then all of a sudden our gifts to charity might be deductible because that might push us over the threshold. So let's go to the mortgage interest and say that we have the home mortgage interest and we'll put that on the schedule A and let's say, hold on a second, I went to the wrong one here. I want to go to the schedule A, is that where I'm at? And I want to go to the interest and I want to go to, here, let's put our good old $12,000 there and then let's put in the taxes that we have now added real estate taxes, which we've been standardizing, putting like $6,000 on the real estate taxes for the principal residence. This will depend greatly on where you live. So obviously a higher cost of living areas are subsidized more strongly by the system of the federal income tax system, like California and New York, for example, taxes now at the $6,000 plus the $1,205 gets us to the $7,205 plus the $12,000 interest and the $10,000 gifts to charity bring us up to $29,205. If we pull that back over to the form $1040 is above the threshold, therefore those charitable contributions are now benefiting us. Let's mirror that so we can see it on our worksheet. We're going to go to the schedule A and we're going to say, okay, what did we have? We had taxes. We had the real estate $6,000 and I think it was $1,205 was the sales tax calculated by the system, $1,205, okay. And then we also have the mortgage interest, which would actually I'm going to put these over here. Copy paste them on this side. Mortgage interest, which would be reported on the 1098, 12,000, I think we said, and then our charitable contributions are now we're going to say that it was 10,000, which are now contributing for us, bringing us up to $29,205. If I go back to the first page of the 1040, the $29,205 is greater than the standard deduction $13,850. So that's what we're going to be taking the $29,205, the greater or max of the two bringing the taxable income to $70,795. Is that what we have over here? Let's go back to the form 1040 scrolling down $70,795, $70,795. I won't readjust the taxes, but obviously page two, the taxes would be reduced based on the standard deduction. Now it calculating at to 10,787. So obviously then the question is, well, what kind of documentation do we need to be taking this $10,000, which we discussed a lot more in detail last time. You can see here says, gifts by cash or check. If you made any gift of $250,000 or more, then we can see the instructions. We saw a lot of detail on that in prior presentations. So if they were cash contributions and you made singular cash contributions over the $250,000, you might need more documentation for those transactions, but also just realize that you do not have as you do with the mortgage interest at 1098 here. That's going to also give the information not only to you, but also to the IRS. You might get information from the charitable organization like a church or something that would list out all of the cash contributions that you have given, which is great because that allows you to have the backup source in the event of an audit. But when we're thinking about these kind of deductions, the IRS doesn't actually have them on their end. So then the idea of how they're going to regulate it is not that they're going to try to double check to what they have received from the charitable organization typically, but rather they might do random audits. And if they were to audit someone, they would want to see the required documentation, which would be one of the easiest ways you would want documentation is to have an audit trail. Meaning, you don't typically want to pay these contributions with cash. Now, again, if you're in like a church or something like that and you just put cash into the bowl or what not, then that's good and that's fine. But with regards to taxes, if you want to get the deduction for it, what you would like to do is have some kind of audit trail. So then you would like to have a check or you would like to have a electronic transfer that would be helpful so that you could track the information. If you want the deduction, you want the audit trail. That's the general idea, which kind of defeats the purpose. To some extent, you would think in some cases of giving to charity, which is not supposed to be about showing it off or anything. But anyway, but that's how it is if you want the deduction typically. Okay, so obviously also it has to be a charitable organization that you're giving the money to. And this is all stuff that we talked about in a prior presentation, so I won't go into that in detail. Now, there are AGI adjusted gross income limitations on the gifts, which you can get into in more detail with publication 526. So the general idea is going to be then that usually if you're talking about lower income taxpayers, the gifts aren't going to be beneficial because they're not going to clear the threshold to itemize. Upper income taxpayers are usually not going to hit the problem in terms of limitations on the gifts because they're going to have a high adjusted gross income, but you might run into situations where they do hit the limit. So in those cases, you can look at publication 526 and the software, of course, will help you to calculate your limits. So your cash contribution or contributions of ordinary income property are more than 30% of the amount of Form 1040 or 1040 SR Line 11. Your gifts of capital gain property are more than 20% of the amount on Form 1040, 1040 SR Line 11, which is going to be Line 11 is the adjusted gross income. So let's, for example, say that we had the adjusted gross income, as we can see here is the Line 11 100,000. So let's say we put like 70,000 into it and we said, okay, 70,000 and I go back on over and we go to the Schedule A, then you can see it got limited here to 60,000. So you can see why that would not likely be the case because if they made $100,000, putting in 70,000 would be a quite large threshold. So most people aren't going to hit that, but you might end up in situations where people have some funny year or whatever for whatever reason and they have this substantially large gift to charity. If that happened, then the question would be, well, what about the 10,000 that I didn't get this year? Do I just not get a benefit from it? Usually when that happens, the question is you might be able to take it back or carry it forward with charitable contributions. Typically that would be a carry forward situation. So within our worksheets, for example, we'll typically have some kind of carry forward worksheet. So there's the 70,000, only 60,000 was allowed. Then we have to carry forward of the 10,000. Anytime just from a logistical standpoint, if you have a new client or if you're doing your own taxes with a new software, you might want to first, if you have a more complex return, which I would say is any return with a schedule A, enter the tax return into the prior software, in this case tax year 2022, so that you can then perform or carry it over to the current tax year so that things like this, the 10,000 carryover will populate as well as possibly helping you to see if the state tax refund is something that has to be included in income and so on as we talked about in prior presentations. All right, back to schedule A. So like I said, that's probably unlikely that you're going to hit that most of the time because that would be a high threshold, but just to be aware of that threshold, let's bring it back to the 10,000. Now, another common thing that will happen in practice is people made a gift, but they got something in return like they went to a dinner or something like that. So if you get the documentation for those kind of gifts, then the documentation will generally tell you here's the value of the meal that was given and here's the amount of the actual gift so that you can properly calculate how much should be going on the return, not the full amount that was paid, but that amount minus the value that they received in return if it was like a meal, the value of the meal. Also note that people will often have questions about volunteer work. Now, if they did volunteer work for something like, as a professional, like a CPA or a lawyer or something like that, there might be some deductibility there, but if you're talking about like minimum wage type of labor work, like a soup kitchen or something like that, you may not be able to deduct the wages, equivalent to wages of that. However, you possibly could have, contributions can be in cash or property of out-of-pocket expenses you paid to do the volunteer work for kinds of organizations. So you might have out-of-pocket costs to do the work. So for example, if you drove to and from the volunteer work, you can deduct the actual cost of gas and oil or 14 cents a mile. So you'd have to, if you want the actual costs, calculate the actual costs of the gas and so on. The 14 cents a mile is a lot lower threshold than the mileage rate that you would have for like a business, for example, which is what most people typically think of when they think of like a standard mileage rate. So now we have amounts other than cash or a check, and if we have a situation where the deduction is more than $500, if the amount of your deduction is more than $500, you must complete and attach form 8283. So this is often a pain to do the taxes because now we're thinking, okay, there was something other that we have non-cash contributions. If it's under a threshold, we might be able to put it basically here. We could say like if it was $400, we'll put it here. If I go back on over to the forms, so now we've got the 10,000 cash contributions, and then we have other than cash or check. If you made any gift of 250 or more, you could see the instructions there. You must attach form 8283 if over $500. So we had the 400 here, so it's under the threshold. If it's over that amount, I'd have to go back on over and say, okay, now we have to do the other form, which might look something like this. Now typically we'll have some documentation from the organization that charity was given to, but that documentation will typically be somewhat limited. So for example, let's imagine taxpayer gave household goods to Goodwill. Goodwill then is going to have some documentation that we might have, which by the way, the IRS does not have. This is not like a 1098 which is given to us and also to the IRS. It's just something that we have to help us to prepare the tax return and to have handy in the event that the IRS has an audit. So let's say it came from Goodwill. On that documentation, we should of course have the address. So that's going to be useful for our data input as well. And then we're going to need some kind of description. Often the documentation will at least tell us that it was clothes and household goods or something like that. And that's usually going to be kind of the limitation on the documentation because remember that this isn't like a pawn shop. The Goodwill area or place is not going to be saying this is the value of these goods. That's not their job. They're not going to take on that liability. They're not an appraiser typically. So then the question is, well, how am I going to value this? Now we talked about some scenarios if it's a vehicle, if it's a large item, but we're going to imagine it's like household goods. The date of contribution. This is going to be something that we will have. They're going to know when the stuff was given. So that should be on the documentation, not a problem. What about the date acquired when the taxpayer purchased it? Well, you probably don't know that. It might be a whole bunch of dates. It was a long time ago. So in Lesser we can put a negative and then I put a date in here and that'll give us like various dates. It was purchased at various times. How acquired? Usually it was through purchase. Not always. It might have been an inheritance or something. The donors cost or basis. I'm going to imagine it to be $1,000 and the fair market value 300. Now, how did I get to this 300 from the thousand? First of all, you might not remember how much it cost but it's likely that you might be able to get a better estimate or be able to know what the actual purchase price was and you might start from there then to kind of figure out what you think would be an appropriate fair market value. In this case, I took 300 versus the thousand. You might use some kind of percentage or something like that to calculate it. This is where the difficulty comes in because when we're determining fair market value, what does that mean? That means that if you had a willing purchaser and you sold it on the fair market on the market, that's how much you would receive. However, finding a willing purchaser is difficult to do. That's what these online platforms kind of help us to do these days. But if that was easily to do, we would have done it probably. And so it might be difficult to come up with that number. It's useful in theory to think of, yeah, it's the fair market value but this is where the appraisal process is going to be a problem and you're going to have to come up with the number that you think is appropriate in those cases. If it's a large, we talked about in prior presentations, if you're talking about large dollar amounts, you're giving a car or something, then you're going to need an appraiser which is an outside party making an estimate of the value. And then I'm going to say it's a thrift shop appraisal value. So if I pull that back on over, now we've got the 10,000 gifts for cash, the 300 that is also being populated on the form 8283. So let's go to that form, form 8283. And so we have the non-cash charitable contributions. We have then the name, Goodwill, the address. Here's the description, clothes and household goods and so on. We have the date of contribution, date acquired by the donor. It put various because I put a negative date into this particular software purchase. We've got the cost we're going to say is 1,300 for the fair market value. And we're going to say it was valued using the thrift shop value. That's just a general idea of how you might populate it, you know, how what it looks like kind of in the software. And then that's pulling over to the gifts to charity, which is now at the 10,300, adding that to the other itemized deductions, 29505 pulling to the form 1040. And then we have on the form 1040, the 29505. So that's the general idea. If I go back on to the, to the schedule a, that's the general idea. You could see your carryovers here. So if you did have a carryover from the prior year, it was over a certain threshold. Then we can, we could say, what would that look like in the current year? Here's basically our carryover worksheet. So if we had like, you know, a thousand carrying over from the prior year, then that would be populating here. Now that is deceivingly simple to input. You can see how complex this data input is because the carryover could be carrying over from multiple different years with multiple different categories. The categories could have changed for multiple different years. So if you get into tax planning for higher income individuals who are getting more in depth in terms of their charitable contributions and strategic ways to make the contributions, this can, this can start to be a little bit more messy, but for typical tax paying scenarios, you know, that's the general idea with the charity. The, the general concept being if they didn't itemize last year and they're not close to itemizing this year and they didn't do anything different such as purchase a home, then they're probably not going to have charitable deductions unless they have a whole lot of them, because they're not going to go over the threshold. If they do have a home and therefore mortgage interest typically and the real estate taxes, then you're going to want to of course ask more questions about all other categories of itemized deductions that they might get a benefit from such as the charitable contributions. And then you have that limitation on the charitable contributions, which often isn't going to be hit because it's a pretty high threshold, but you want to basically keep that in mind. And then the question is between non-cash and cash contributions. How do you put that into the system? How do you value non-cash contributions that you need to keep in mind and also keep in mind the rules for holding on to the documentation noting that the IRS does not have the information on a 1099 or 1098 in this case, but are still a threat because they still could have an audit in which case if you had a large charitable contribution, they're going to want to see the documentation on it.