 Income tax 2023-2024, itemized deductions, charity gifts by cash or check and other than by cash or check. Get ready and some coffee because we need extreme concentration when doing income tax preparation 2023-2024. Most of this information can be found in the instructions for Schedule A, Tax Year 2023, which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula, we're focused on what I would call the below-the-line deductions. More specifically, the itemized deductions. Remember, in the first half of the income tax formula is basically a funny income statement. Most income statements having income minus expenses resulting in net income here having income minus various deductions resulting in taxable income. Noting deductions for taxes are good. Therefore, we'll typically look for more of them and the difference between the above-the-line deductions. 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 our, trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant. Because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. And the below-the-line deductions include that the above-the-line deductions do not need to clear a hurdle such as the standard deduction in order for them to be useful, whereas the itemized deductions typically do need to clear the hurdle of the standard deduction before they are useful to the taxpayer. First page of the form 1040 focused on line number 12, standard deduction or itemized deduction taking the larger of the two. If we are itemizing, then we'll have the Schedule A. Schedule A is the itemized deductions. We see a list of some of the categories on the left although this is not the entire schedule. Noting that the itemized deductions have to clear the standard deduction based primarily on filing status. So we'd want to memorize the hurdles to clear. Single filer 13, 8, 50. Married filing joint double to 27, 700. Head of household in the middle 20,800. If they're over a certain age and or blind, we have an increase of those standard deductions. Here's for a single filer if one or two of those combo. Married filing joint where we have four combos that could be met to taxpayers to items. And there's the related standard deductions. Okay, let's move on to the charitable contributions. Noting and recalling to keep straight in our mind the normal or natural types of deductions for an income tax. Versus deductions that are kind of unusual for a normal kind of deduction for income taxes would be those expenses that you need to expand in order to generate the revenue. Which can clearly be seen most easily on something like business income that often is reported on a schedule C where you have income minus the expenses you needed to generate the income. That makes sense from an income tax perspective because you don't want to tax people on their gross income but on their net income. However, most people have double you to income in which case we're assuming that the expenses were provided by the employer. Remember that the itemized deductions what we're talking about now are usually not natural to an income tax system. They're not things that are used to help to just generate revenue so the government can stay out of our business and just protect us with the military. But rather they're designed to nudge us in particular directions which clearly is what is happening with charitable deductions. The argument would be that they're trying to incentivize charitable contributions. A cynic might say that they're trying to tell us which contributions or which charities are worthy of our donations and direct the money where they want it to go kind of thing. But that's the idea so we have to then think about those charitable contributions in alignment with the schedule aid deductions. So gifts by cash or check. So enter online 11 the total value of gifts you made in cash or check including out of pocket expenses unless a limit on deduction gifts applies to you. So we talked a little bit about some of the limits in a prior presentation. Remembering that if you're looking at lower income taxpayers the problem is they might not be able to get a benefit from giving to charity because they're not itemizing. Higher income taxpayers usually are not going to hit the limit of in terms of how much they can put into a charitable contribution because it's fairly high. But it's possible that they put more money in than they're allowed to put in given the limitations which will be based on their income or more specifically typically their adjusted gross income which will be helpful to determine using tax software typically. So for more information about the limits on deducting gifts see limit on the amount you can deduct which we looked at earlier. If your deduction is limited you may have a carryover to next year. So again the limitation not quite common but could happen for higher income individuals depending on what they are doing. Then the question is do you lose the deduction entirely or do we get to carry it back or carry it forward. Typically with the charitable contributions you might be able to carry it forward. For more information on that you could see publication five to six for more information. So deduction for gifts by cash or check limited. If your deduction for gifts you made in cash or by check is limited see publication five to six to figure the amount you can deduct. Only enter online 11 the deductible value of gifts you made in cash or by check on the actual schedule a record keeping for any contribution made in cash regardless of the amount. You must maintain as a record of the contribution a bank record such as a cancel check or credit card statement or a written record from the charity. Now when we think about the audit trail the audit trail is really important if we're have a legitimate type of deduction. Notice there's multiple kind of concerns with different kinds of payments and how much intervention the government has in individuals businesses. Meaning usually Americans might not like the government tracking all of the things that they are paying for and whatnot. And cash is typically king in that you can spend cash on things and you don't have that kind of audit trail that you typically do have when you have like a credit card transactions or electronic transactions. However if you have a deductible item if it was like a business expense or if it was something that you expect to deduct on the schedule a you of course want the audit trail. Not because you have to report it at least not at this time when you do your taxes on the tax return on the 1040 but in the event of an audit then they're going to want to see that kind of audit trail. You can't just say well I paid it out I got some money out of the ACM and then I paid it to somebody or he took the money out of from underneath my mattress and then I just kind of paid it. Now you want to have the audit trail so that you can verify the payment. So the written record must include the name of the charity date and amount of the contribution. If you made contributions through payroll deduction see publication 526 for information on records you must keep. Don't attach the record to your tax return instead keep it with your other tax records. So this is one of those items where the iris does not have like a 1099 or a 1098 telling them how much money you gave to charity. It's something that you still have the capacity to voluntarily report which is supposed to be our whole tax system a voluntarily reporting system where they verify with audits in a similar way. As if you're driving on the freeway there's a speed limit. You're not going to get caught all the time if you're speeding but sometimes the officer might you might get caught sometimes right. And the way to apply that same kind of philosophy on taxes is to have some format of random audits right so they can check people and see if they're in compliance. And if not have the penalties high enough that it will dissuade you from cheating basically in the future. So for contributions of $250 or more you must also have a contemporaneous written acknowledgement from the charitable organization. So if you're going over that $250 $250 limitation you all also want the documentation from the charity not just basically your your written records and hopefully an electronic transfer or a cancel check or something like that. Most charitable organizations will flaunt the fact that they're charitable organizations because that's how they make money and hopefully they will be good at reporting to you any gifts over the 250. So you can see gifts of 250 or more earlier for more information which we discussed. You will still need to keep a record of when you made the cash contribution if the contemporaneous written acknowledgement doesn't include that information. Line number 12 other than by cash or check. So enter on line 12 the total value of your contribution of property other than by cash or check unless a limit on deducting gifts applies to you. So for more information about the limits on deducting gifts you can see those same limits on the amount that we looked at earlier. If your deduction is limited you may have have a carry over to next year similar kind of process we discussed deduction for gifts other than by cash or check limited. So if your deduction for the contribution of property other than by cash or check is limited you can see publication 526 to figure the amount that you can deduct tax software is of course helpful in that situation valuing contributions of used items. So now we've got the situation which is often kind of problematic or a headache to tax preparers you gave something to charity that was a used item. Well that's going to be a little bit more difficult to deal with than just giving a cash value to the charity because when you give cash to the charity or a check to the charity or an electronic transfer we know how much was given. But if something was given that was a used item it still of course has some value or else the charitable organization theoretically wouldn't want it but what is that value. So if you give used items such as clothing furniture deduct the fair market value at the time you gave them. So then the question is well how in the world am I going to know what the fair market value is because the fair market value is determined by trading things selling things on the fair market. And if you have used clothes then it's like you would have to find a buyer that would want the used clothes first of all and then what would be the fair value of that kind of transaction difficult to say which is probably why you're giving it away. So it's a theoretical concept that works well for us the fair market value but in practice difficult to determine. So fair market value is what a willing buyer would pay a willing seller when neither has to buy or sell and both are aware of the contributions of the sale. So for more details on determining the value of donated property if you want to dive into that in more detail publication 561 561. So deduction more than $500. So if the amount of your deduction is more than $500 you must complete and attach form 8283. So now you need more detail because you're over the dollar limit when you're giving clothes and whatnot. So for this purpose the quote amount of your deduction in quote means your deduction before applying any income limits that could result in a carryover of contributions. So contribution of motor vehicle boat or airplane. So now we've leveled up from giving like clothes and things like that to giving some type of vehicle a boat or an airplane which of course the dollar amount you would think would go up. You have the same problem in that although you can kind of look at the Kelly blue book of a vehicle or a boat or something like that or an airplane. They are all unique in that you have different wear and tear and maintenance that has been kept on those therefore determining the fair market value is difficult. So if you deduct more than $500 for a contribution of a motor vehicle boat or airplane. You must also attach a statement from the charitable organization to your paper return the organization must use form 1098 C to provide the required information. If your total deduction is over $5000 500 for certain contributions of clothing and household items discussed next. You may also have to get appraisals of the values of the donated property. So clearly when you're looking at high dollar amount items now you have charitable deductions you've allowed charitable deductions to happen. And now what are people going to try to do if you're trying to game the system. They're going to try to give a lemon of a car a piece of garbage car and then overvalue it right because then you get a large deduction. So there are many scams that are set up you know from a tax planning. You know people doing kind of shady things on the tax preparation side with regards to charity contributions because when you get into this valuation of the thing that is being given. It's easy to then try to say why overvalued it. Well how do we stop people from overvaluing something like a car or a boat or an airplane. We can force them to take an appraisal which is basically it's kind of like a home appraisal. Someone's going to come in hopefully a third party will come in and give an accurate valuation of the property. Even that is going to make it difficult because that means like the third party appraisal person could also be leaning towards the high end of the appraisal because they know where their bread is buttered. They're trying to the person who wants the appraisal wants the value to be high because they're trying to get a deduction. And so that's where the issues come in. So you could see form a to a three and it's and it's instructions for details if that applies to you. Contributions of clothing household items a deduction for these contributions will be allowed only if the items are in good used condition or better. So again what does that even mean. It's nice wordage in theory but that's hard to know in practice. So however I might my clothes are good usable even with holes like all all over them right. It's still still good. It's still good. It's like albundi socks right. I don't know. However this rule doesn't apply to a contribution of any single item for which a deduction of more than $500 is claimed and for which you include a qualified appraisal. And form a three eight to eight three with your tax return record keeping. If you gave property you should keep a receipt or written statement from the organization that you gave the property to or a reliable written record that shows the organization's name and address the date and location of the gift and a description of the property. This is going to be important for us because typically you might have to have that information in order to enter into the actual tax return. Now note what the organization cannot give you. They can't give you the actual amount meaning if you gave them clothes or something like that they're not going to know the value of the clothes. They're not going to want to take on that liability to try to value the clothes they're not upon shop. They're going to instead give you the information saying hey this is what was given to us. This is the date that it was given. Here's our address and so on. And that's what we're going to have when we're trying to enter this into the tax return hopefully. So for each gift of property you should also keep reliable written records that include how you figure the property's value at the time you gave it. So if you get audited this is what they're going to ask you. We'll give us evidence that property was given and then give us some kind of explanation as to how you came up with the value that you put on the tax return. So if the value was determined by an appraisal keep a signed copy of the appraisal. So if it was a high dollar amount item then you might have got the third party appraisal which gives you more solid support. If it's a lower dollar item and you don't need the appraisal you might not have the appraisal and you did the best you could with what you had. So the cost or other basis of the property if you must reduce it by any ordinary income or capital gain that would have resulted if the property had been sold at its fair market value. How you figured your deduction if you choose to reduce your deduction for gifts of capital gain property any conditions attached to the gift. So if the gift of property is $250 or more you must also have a contemporaneous written acknowledgement from the charity. See gifts of $250 or more earlier for more information. You have form 8283 doesn't satisfy the contemporaries written acknowledgement requirement and a contemporary as written acknowledgement isn't a substitute for the other records you may need to keep if you gave property. Line 13 we have the carryover from the prior year. So we saw that there were possibly limitations on how much you can give to the charity on the higher income side. If you're on the low income side you're probably not going to get any benefit any tax benefit because you're not going to be itemizing higher income side. You could be limited if in one year a lot of money was given to charity and it was over the AGI limitations in which case you might be able to carry over to the following year. So if that happened in 2022 you gave more than you were allowed to give then you might have a carryover from 2022 to 2023. Noting that if you're using tax software if you're a tax preparer and you have itemized deductions you have a more complex return I would recommend if you have a new client for example entering the entire prior year tax return in the prior year software so that when you roll it over to the current year the software will help you with these carryovers so you make sure that you don't miss them. So you may have contributions that you couldn't deduct in an earlier year because they exceeded the limits on the amount you could deduct. In most cases you have five years to use contributions that were limited in an earlier year. Generally the same limits apply this year to your carryover amounts as applied to those amounts in the earlier year. So in other words if you were limited to the amount of the contribution that you can take last year you gave more than you can take you might be able to give it this year. If you then had more that you can give this year the same limits would apply you would think right same idea and then it would roll forward to the following year. However carryover amounts from contributions made in 2020 or 2021 are subject to 60% limitation if you deduct those amounts in 2023. So they kind of messed with the limitation thresholds in a few years which obviously complicates things a bit when you're trying to do your carryovers and so on. After applying those limits enter the amount of your carryover that are allowed to deduct this year's C publication 526 for more details. Now obviously software again helpful with that.