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Itemized Deductions, Tax Credits, and More to Be Aware of This Tax Season

Candace Varner

Ben Hake

In this episode, Tax Directors Candace Varner and Ben Hake discuss several deductions and credits you may be eligible for this tax season (including charitable donations, medical expenses, childcare, etc.). They also give specific tips for lowering your tax bill when it comes out higher than expected.

Listen to The Financial Considerations of Being Your Own Boss: https://creativeplanning.com/podcast/the-financial-considerations-of-being-your-own-boss/

The Standard Deduction podcast is hosted by Tax Directors Candace Varner and Ben Hake. This podcast is a thoughtful, informed discussion about ideas, trends and developments in taxes related to personal wealth management.

Our mission is to educate and inspire people to make better financial choices through knowledge, tools and strategies. We believe that education and planning are key components of financial success. Come explore relevant financial topics with our team.

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Candace Varner: Hello, welcome to The Standard Deduction. I’m Candace Varner.

Ben Hake: And I am Ben Hake.

Candace: Ben, what would you like to talk about today? Your choice.

Ben: Oh, lucky us and maybe lucky for the listeners. We’ll find out. Recently I had a buddy of mine ask why doesn’t the IRS just prepare my return for me? They got my W2. They know what I made. Can’t they just send me the return? I told them that I like my job security so that’s probably not a very viable option and that I enjoyed preparing tax returns. So we got multiple reasons that that shouldn’t be the case.

Candace: I’m going to leave aside the part where we enjoy preparing tax returns because I think that could be an entire separate topic. But the real reason I tell people that is it’s not in your best interest to let them do that. The W2 they have, yes. The 1099s they have. They’re really good at having all of your income sources. They don’t know any of your deductions. So it’s to your benefit to get all your stuff together and file it yourself. Also so that your CPAs can have what we’re going to currently call fun during tax season.

But they do that by design. So they want to know what all your income is to make sure you report it. So whoever paid you, they report it to the IRS. You report it on your return. They match it up. But almost all of your deductions are not that way. So as you’re finishing up your tax returns over the next 30 to 40 days, make sure you’re gathering all these things that we’re talking about today.

The biggest one I usually start with is itemized deductions. So starting in 2018, a lot fewer taxpayers itemized their deductions because the standard deduction was increased so much, but I still encourage people to look at each category and see if in any given year it applies to you. There’s a multitude of ways that each one of these things we’ll talk about may or may not apply.

The first one and often the biggest one is charitable donations. These are going to fall into a couple different categories. The first would be what you usually think of, which is just cash donations. You wrote a check to someone, you gave them cash. You did it online, something like that. This year into 2021, even if you don’t itemize your deductions, you can still deduct up to $300 per person in charitable donations for cash. Cash meaning cash or check or all of those. But even if you are not planning to itemize or don’t end up itemizing, you still want to gather those receipts and be able to deduct $300 per person, $600 for married filing jointly.

The other thing I get asked about a lot is non-cash donations, which are essentially things that people are donating. Anything other than cash. Think household items, clothing, furniture, all the stuff you’re making trips to Goodwill, Salvation Army, and other places for. The value of those, the value of your used items, is deductible but you need to be careful about how you’re going to value those. If you are not sure, there’s a good guide on the Salvation Army website that’ll help you give upper and lower ranges for something in really good condition or poor condition and what those values might be. It’s not going to be what you paid for it because now it’s used. But if you’ve donated all those things, keep track of what you’re donating. You have to be pretty reasonable with the donation values. If it’s more than $500 in total for the year, you’re going to have to attach a separate form. And if you’re donating more than $5,000 worth of stuff in the year, you’re actually going to need an appraisal. So you can’t just make up large values and say that you donated it.

The last big one for charitable are qualified charitable distributions. This is something where you can give, if you’re over 70 and a half, you can give directly from your IRA accounts to the charity. So the cash never comes to you. Goes directly from one account to the charity. If that’s the case, then you can just exclude that from your income in total. So you take $10,000 out of your IRA, but 5,000 went to you and 5,000 went to a charity. You only have $5,000 of income. This is going to be key if you are not itemizing your deductions. It’s a different way to effectively get the charitable deduction.

Now, the trick with this is when you get the form, you get a 1099-R that shows all the distributions from the IRA account and it’s going to show the full 10,000. It’s in no way going to show you that anything went anywhere other than you. It’s a hundred percent on you to know where it went and make that adjustment on your tax return. So be careful with that. The form does not show that it went to a charitable organization. Ben, that was a lot about charitable.

Ben: That was indeed and that’s definitely the more fun of the items to talk about. The other item that we have quite a bit of questions about is going to be medical expenses. So what Candace was describing is assuming you’re itemizing, the first dollar you give of charitable is a deduction and so is the 10,000th dollar. Medical’s a little unique. So the IRS says, “Hey, before you can deduct anything, you’ve got to clear this hurdle,” which is going to be 7.5% of your income. Because I like simple math if you make a hundred thousand dollars, that means the first $7,500 of medical costs you incur wouldn’t be deductible, but only the 7,501st dollar would be. Medical is one of those things where you pay, unfortunately, a variety of people a variety of ways and it could be a real pain to track down.

So the first thing I tell clients is that if your health insurance is provided by an employer, then the premiums that you pay have already been reduced out of your W2. So that’s not something we need to track down and because we’ve already gotten the deduction on our W2, it means it’s not eligible for the itemized deduction. For our self-employed clients, they have another method with which to do that, where it’s not subject to that limit. So for a lot of our clients, when we’ve removed the premiums, again, if you make a hundred thousand dollars, I’m hopeful that you haven’t incurred out of pocket costs above and beyond that of 7,500.

So for some clients you’ll have a unique year and a lot of the times it’s those things that aren’t covered by insurance. So historically I’ve seen people who have had extensive dental work done. That’s a pretty high out-of-pocket item. Or for older clients who have purchased hearing aids, again, an item that’s not really covered by insurance. So with some of those, it’s pretty easy to get four or $5,000 charges on one thing and that’s when it can start to add up. Now that also means that if you have an extremely high income of let’s say $500,000, it means it’s highly unlikely, short of something catastrophic occurring that you would ever be able to deduct your medical costs. So not something you probably not going to spend a lot of time finding every CVS receipt and putting that together into what I can only imagine is a hundred foot long scroll and then sending it off to me for tax return purposes.

So again, medical for a lot of our clients, it’s going to either be somebody who’s got very expensive recurring charges. So a lot of the times it’s going to be long term care for elderly individuals. Or are going to be somebody with a relatively low income who again, if your income’s $10,000, it’s a lot easier to hit that 7.5% threshold. Outside of the medical, the one thing that again, Candace kind of touched on is in 2018, one of the big changes from the tax reform was that your state, local, and income taxes and real estate taxes were capped at $10,000. So we have quite a few clients who paid the state of California and

New York, $10,000. Why do I even need to bother trying to find my real estate taxes or property taxes? I’m going to get limited to 10,000 no matter whatever dollar amount I tell you.

The reason for that is very few states have kept that $10,000 cap at the state income tax level. So on the coast, California and New York, they still allow a deduction for the entirety of the amount spent on real estate and personal property taxes that you’ve paid. So although you may not be able to get a substantial federal benefit out of it, there still can be quite a bit of savings, especially for homeowners with very expensive properties in some of these states. Candace, we’ve hit itemized deductions pretty extensively. What else do people need to be aware of?

Candace: The next biggest expense you’re going to have is your kids. The childcare expenses, the credit for these is expanded this year. If you have kids in daycare, you know that you are paying an arm and a leg for this all the time. I can tell you that when I found out I was pregnant with twins as an accountant, this really blew my budget thinking how much the daycare was going to cost. But I want to mention first that both spouses have to work in order to claim the credit. So if one of your spouses is at home and they’re just going to a preschool sometimes, or something like that, this isn’t going to qualify. This is mostly full-time daycare or afterschool care when both spouses are working.

But the amount of credit was increased this year. You get a percentage of the amount that you spend. Unfortunately, it’s still not going to be probably close to what you’re actually spending, but a portion of it. The credit is up to $4,000 for one kid or $8,000 for two or more in 2021. Now the other good thing about this is that it’s refundable. So if the credit is more than your total tax liability is for the year, the amount that it exceeds that the IRS will actually pay you. So hopefully your childcare providers are sending you a year end statement. This says this is the total amount that you paid us and it gives you their information. But if they’re not, you should ask for it and make sure that, that credit is included. Then what’s next? HSAs and IRAs. The one thing you can do after the end of the year.

Ben: Yes. One other item I was going to throw out that is a common item of confusion for my clients is that the childcare costs are not an itemized deduction. So you are able to take that credit for your costs incurred totally independent. You could still claim the standard deduction or itemize and that sort of thing. So it is something that even if you think you’re taking the standard deduction, make sure to track down those costs.

Candace: That’s because it’s a credit, not a deduction. Common misconception.

Ben: Indeed. So as Candace mentioned, a lot of the times you’re wrapping up your tax return and you’re figuring out, oh man, this is a little more than I was expecting. What can I do to get this tax balance due down? And the two big ones that a lot of individuals can participate in are going to be contributing to a individual retirement account or an IRA. So there are some income thresholds and it depends if you’ve got an employer plan, but that is an option. The other is going to be contributing to an HSA. Again, you’ll have to have a health insurance plan that’s HSA eligible, but you’ll have until the filing deadline of the return to do that.

One common question we get is right after we file tax season. So it’s April 15th. That first week of May, I probably get 10 or 15 emails every single year that says, “Hey, I just got this 5498. Are we going to change anything on my tax return?” And the answer’s always no and the reason for that is because the 5498 tells how much you put into those accounts that was eligible for the 2021 tax year. If the HSA were

to send that in January and then you made a contribution in February, it wouldn’t end up showing accurate information. So when you receive the 5498, the reason it’s delayed is because you have the opportunity to contribute all the way up to the tax return. So basically the reason it’s always received after the fact is because that way it’s reflecting the most accurate information possible.

Candace: Excellent. I also get a lot of those emails about the 5498. Sometimes people panicking or thinking that we have something big to change, but it’s usually nothing. So as a theme on our podcast, don’t panic. 529 contributions are another one that you probably won’t get a statement about, or at least an official 1099 type form from your plans. But if you made contributions to college savings plans also known as 529 plans usually, many states allow a deduction for that. Every state treats it a little bit differently as far as which states plan it has to be and what the limitations are on the deduction and all of that. But if you made those contributions, make sure you’re looking for that and seeing what the rules are for your state.

You will get a form for any distributions from a 529 plan. Those are not taxable as long as you spent them on qualified education expenses. But they’ll send you a form that just says here’s the total amount you took out. It’s up to you to then say on the forms, I took this out and yes, I spent it on all qualified expenses so there’s no income. Same with the HSA. You’ll always get that form that says here’s how much you took out of the account. You say, well, that’s not supposed to be taxable. It’s not, but you have to show it on the form saying I took this much out and then I spent it all on qualified medical expenses. So please don’t tax me. It doesn’t word it quite like that on the form but that’s what it’s saying.

Some other big ones you mentioned self-employed taxpayers earlier. They’re going to have a whole host of other deductions. You can see one of our earlier episodes called Financial Considerations Of Being Your Own Boss. But if you’re self-employed, a lot of things are deductible against your self-employed income that wouldn’t be when you are an employee of a firm. So you’re going to have an entire separate list of things that we’d want to go over. For those individuals and others, a lot of times they’re making estimated tax payments as well. So make sure you’re tracking down all of the payments you made during the year and listing those on the tax return as payments that were made to reduce the amount that you owe.

The number one reason we usually see notices from the IRS or state is that you list a different amount than they show on your account. They’ll quickly send you something that says, “We show you owe $5,000. You said it was $7,000. Here’s the difference.” Number one reason for a notice. Ben, what are some other random things that people don’t ask about?

Ben: Well, a lot of what we touched on was the IRS is aware of the income you earn so make sure to report it. I don’t know if it needs to be said, but even if the income isn’t reported, so say you earn something and you receive a cash payment, or you’re paid via Venmo or something of that nature, that income is still taxable assuming it was received as part of providing services. Always make sure that even if you don’t have a tax form, if you’ve done something that would generate income, that it’s reported on your return.

Then another one that we, because of the tax reform of ’18 haven’t been seen quite as frequently, is that if you had a divorced decree that was signed prior to the end of 2018 and are receiving alimony, that is taxable income to the recipient and a deduction for the payer. Versus divorces that have been

initiated ’19 and forward, those are nontaxable to either party. So you don’t pick up the income and the other individual doesn’t get a deduction. So those are kind of the two common items that hopefully by now aren’t surprised if the alimony is taxable. But the other piece is that even though you didn’t get a 1099 say for some work done, that doesn’t mean it’s not taxable.

Candace: Right. Common misconception. Couple other things that are more just disclosures on your returns. The first would be if you have foreign bank accounts and the value of those accounts at any time during the year was over $10,000. There is a separate form that you need to file to disclose that those accounts exist. They’re going to want the bank, the bank account number and the maximum value during the year. You’re not going to owe tax for it. You just have to disclose that they exist and you really want to do that because the penalties for not filing that are $10,000 per year. So that’s a stiff penalty for just not disclosing that something exists.

The other one that is getting more and more traction would be cryptocurrency transactions. On the 2021 form towards the top, right after you get done with your name and address, there’s a question with a box there that says, “Did you receive, sell, exchange or otherwise dispose of any cryptocurrencies during the year?” And you have to say yes or no. Now if you bought crypto or just held it, that does not mean you have to check the box yes. But if you received it as payment for services, if you sold any, you exchanged it for a different cryptocurrency, anything where you were disposing of one in any fashion, you have to click yes there. It’s treated like a stock. Think of it like a stock on the stock exchange. So if you bought and sold it, you do have capital gains on that and that income or loss also needs to be reported on the return. All right. So we’ve disclosed everything. We found our deductions. What are the last couple things?

Ben: The last things are kind of unique to 2021 because they haven’t existed for a long time. But during the year there were two payments that a lot of people received. The first is going to be a stimulus payment of $1,400 per tax payer. So similar to the one before, that credit maybe you didn’t qualify for whatever reason in 2020, but would now. So that’s something where you can reconcile that with the return.

The other is going to be the Advanced Child Tax Credit where the IRS was sending parents payments via either electronically or via check each month during the latter part 2021. And that’s something that does need to be reconciled on the return. Maybe you received a thousand dollars in there and there was a larger credit that was due, you’d be able to get the surplus. And if it was potentially a smaller credit than was due, you’d have to pay that back to the IRS. So again, these are things that get reconciled on the return and if you’ve received that form, make sure that you’ve included it on the return.

Candace: And you should have received a letter from the IRS in January saying the total amount of Advanced Child Tax Credit payment that you received. But just look out for that. Like the estimated tax payments, it’s going to be another thing that they’ll quickly reconcile and correct if you don’t have the right amount there. So that is a lot of things to keep in mind as you’re filing your tax returns. So good luck to, well, us, all the CPAs and everyone else listening over the sprint for the next 30 days to the deadline. Assuming we have the real actual deadline this year for the first time in three years, we hope to be done on April 15th. Thank you guys.

Ben: Thank you.

Disclosure: This commentary is provided for general information purposes only and should not be construed as investment, tax or legal advice. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable, but is not guaranteed.

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