Seven Categories of Itemized Deductions

Standard Deduction vs. Itemized Deduction

It is common to claim the standard deduction only if it exceeds a taxpayer’s allowable itemized deductions. The basic standard deduction depends on your filing status and is adjusted for inflation. For 2013, the standard deduction is:

 

  • $12,200 married filing joint
  • $6,100 single
  • $8,950 head of household
  • $6,100 married filing separately

 

Itemized deductions include charitable contributions, interest expenses, state and local taxes, medical and dental costs, casualty and theft losses, job and investment expenses, and certain educational costs. If the itemized deductions exceed the standard deduction then the taxpayer should file the Schedule A of Form 1040. Below are eight categories to consider when looking at itemized deductions however please note that each situation is different and this list is not all-inclusive.

Seven Categories of Itemized Deductions

1. Unreimbursed Medical Expense (Must exceed 10% of Adjusted Gross Income or AGI if under age 65)

Allowable Medical Care Costs:

  • Medicine & Drugs (Prescriptions Only)
  • Diagnostic Tests
  • Health Insurance Premiums
  • Smoking Cessation
  • Weight Reduction Programs

Example: If you and your spouse have a combined $100,000 AGI then the medical expenses would have to be more than $10,000 in order to be allowable.

2. Taxes

Types of Deducible Taxes:

  • Real Estate Taxes
  • State and Local Income Taxes
  • State Sales Tax (if state does not have income tax)
  • State or Local tax based on personal property (Kentucky Vehicle License Fees)

3. Interest Expense

Types of Deductible Interest:

  • Qualified Home Mortgages
  • Home Equity Loans
  • Interest on Loans to Carry Investments (only to the extent of net investment income)
  • Personal or Consumer Loan Interest are NOT DEDUCTABLE
  • Deduction maybe reduced for High-Income Taxpayers

4. Charitable Contributions

Types of Deductible Donations:

  • Religious Organizations (Tithes)
  • Charitable Organizations (501c3)
  • Educational Organizations
  • Un-reimbursed Volunteer Mileage and Travel Expense (14 cents per mile)
  • Contributions is generally limited to 50% of adjusted gross income
  • Deduction maybe reduced for High-Income Taxpayers
  • Receipt is required for donated property valued over $250

5. Casualty and Theft Loss (Must exceed 10% of Adjusted Gross income)

Personal Property Losses Caused by:

  • Storms
  • Fires
  • Other Natural Events
  • Result of Theft

Example: If you and your spouse have a combined $100,000 AGI then the loss would have to be more than $10,000 in order to be allowable.

6. Un-reimbursed Job Expenses (Must exceed 2% of Adjusted Gross income)

Types of Deductible Job Expenses

  • Union Dues
  • Professional and Business Association Dues
  • Job Educational Course
  • Work Clothes (Required Uniform)
  • Travel, Meals, and Entertainment on Trips Away from Home
  • Small Tools (Must have Receipts and Prove Business Necessity for the Tools)
  • Cost of Computer (Must meet Substantial Business need of the Employer)
  • Cell Phone, Calculators, Copiers (Must Prove the Equipment was needed for your Job and Keep record of Time if is used for Business)

Example: If you and your spouse have a combined $100,000 AGI then the loss would have to be more than $2,000 in order to be allowable.

7. Investment Expenses and Tax Preparation (Must exceed 2% of Adjusted Gross income)

Types of Deductible Expenses

  • Investment Fees
  • Tax Preparation
  • Safe-Deposit Box Rental
  • Legal Costs (Must involve Business or Income Producing Property)

Example: If you and your spouse have a combined $100,000 AGI then the loss would have to be more than $2,000 in order to be allowable.

The basic premise, if a taxpayer is married filing jointly, is that if their deductions total more than $12,200 (standard deduction) then it would be advantageous to claim the itemized deduction. Please note that this list does not cover every tax situation or category of itemized deductions however it is meant to be a guide for high-level tax planning.

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Charities Protect Your Donors With The “Magic Blurb”

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Bottom Line:  Non-Profit organizations (i.e. Churches, Charities) must ensure that they protect their donors by including the “magic blurb” stating that no goods or services were provided in exchange for the donor’s contributions no later than January 31 of the year following the donation.

What does It Mean:  In a recent tax court case a Texas couple, the Durden’s, were denied a deduction for a $25,171 cash contribution to their church. As customary the church sent the couple a letter acknowledging the charitable gift in January however the Church failed to include the “magic blurb.”  When the Durden’s were audited, they produced this statement to the IRS and were denied the deduction. Later, the church produced a second statement that included the proper wording however the tax court ruled that the statement was not received by the due date for filing the Durden’s original return for the year. In the end, the tax court sided with the IRS due to the fact that the Durden’s did not have the proper receipts to take the deduction.

This is a sign as to the extent that the IRS is prepared to go in order to make taxpayers have the documentation to support taking the charitable contribution deduction.  Here are some steps, from the IRS Guide, that will keep the church/charity and donor safe in regards to substantiating the charitable contribution deduction:

  1. A donor must have a bank record or written communication from a charity for any monetary contribution before the donor can claim a charitable contribution on his/her federal income tax return.
  2. A donor is responsible for obtaining a written acknowledgment from a charity for any single contribution of $250 or more before the donor can claim a charitable
  3. A charitable organization is required to provide a written disclosure to a donor who received goods or services in exchange for a single payment in excess of $75 no later January 31 of the year following the donation.

Sample acknowledgment of a financial donation to a 501(c)(3) nonprofit:

Thank you for your contribution of $ (amount) to (organization’s name) on (date) . Your support  will (add briefly what this donation will do). (Organization’s Name) is a 501(c)(3) nonprofit organization. Your contribution is tax-deductible to the extent allowed by law. No goods or services were provided in exchange for your generous financial donation.

Technical Details:

For you that must know the specific section of the tax code referenced in this case, please check out this quote and link to a great technical article on the subject.

“Individuals claiming charitable contribution deductions should be mindful of the substantiation requirements of Sec. 170(f)(8) to avoid having a deduction denied over negligible omissions. In addition, charitable organizations relying on the goodwill and financial contributions of donors should pay particular attention to the requirements of Sec. 170(f)(8)(B), ensuring that documentation is provided in a timely manner and meets every requirement, no matter how trivial, to substantiate deductions for their donors.” - Carrie Sowders, CPA, AKT LLP, Lake Oswego, Ore. (http://www.aicpa.org/publications/taxadviser/2012/december/pages/clinic-story-02.aspx)

References & Helpful Links:

Tax Court Memo 2012-140: Durden vs. Commissioner of Internal Revenue

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Inspired By Jimmy John’s Epicness

Yesterday I had a blast from the past.  I recently resigned from my job and for my last meal I wanted to visit a restaurant that I have been craving since I graduated college in 2004, Jimmy John’s.  When we arrived I felt like I was back at The Ohio State University in the early 2000s, making a choice between ramon noodles and a Jimmy John’s sub, while listening to an O.A.R. CD.  However the reality was that I am 31 years old now, we car-pooled to Huntington (West Virginia) in order to save gas, and we could not stay long because someone had a meeting after lunch.  Even with all of that boringness, Jimmy John’s delivered just like I dreamed it would and additional people were introduced to Jimmy John’s glory.

Jimmy John’s not only serves a great gourmet sandwich but I have always felt that the experience was what created this legend in my mind.  The company philosophy of an honest, fast experience with a decent price is coupled with a delivery that is billed as “subs so fast that you’ll freak,” helps to make it a favorite on college campuses.  I think that we can all learn from this in respect to the business development process of innovation, qualification and orchestration (The E-Myth Revisited) a great product that creates a customer experience that has in my experience built an eight year craving that has finally been met.  If you talk to others that had a similar experience in college then they will express their loyalty to this restaurant.  On the history section of their website I found this to be useful in explaining why I like them so much:

“Make a deal, keep a deal” is the Golden Rule. Do it now – make it happen – be a go-getter, no excuses. Jimmy John’s employees are the ordinary people doing extraordinary things. They want to be the best. They don’t mind doing whatever it takes to get the job done. Their hustle is part of how they live their daily lives, and they enjoy the fruits of a hard-earned entrepreneurial lifestyle.   http://www.jimmyjohns.com

As an added bonus to the visit, my friend Josh pointed out one of the many signs that are placed throughout the store, which is very applicable to the small business wisdom subject matter.  From searching the internet the regarding this sign, it seems that many have noticed and were influenced by the displaying of Warren Buffet’s Ten Rules for Success.  I found them insightful and useful so here they are:

  1. Reinvest Your Profits: When you first make money, you may be tempted to spend it. Don’t. Instead, reinvest the profits. Buffett learned this early on. In high school, he and a pal bought a pinball machine to put in a barbershop. With the money they earned, they bought more machines until they had eight in different shops. When the friends sold the venture, Buffett used the proceeds to buy stocks and to start another business.
  2. Be Willing to Be Different: Don’t base your decisions upon what everyone is saying or doing. When Buffett began managing money in 1956 with $100,000 cobbled together from a handful of investors, he was dubbed an oddball. He worked in Omaha, not on Wall Street, and he refused to tell his partners where he was putting their money. People predicted that he’d fall, but when he closed his partnership 14 years later, it was worth more than $100 million.
  3. Never Suck Your Thumb: Gather in advance any information you need to make a decision, and ask a friend or relative to make sure that you stick to a deadline. Buffett prides himself on swiftly making up his mind and acting on it. He calls any unnecessary sitting and thinking “thumb-sucking.”
  4. Spell Out the Deal Before You Start: Your bargaining leverage is always greatest before you begin a job – that’s when you have something to offer that the other party wants. Buffett learned this lesson the hard way as a kid, when his grandfather Earnest hired him and a friend to dig out the family grocery store after a blizzard. The boys spent five hours shoveling until they could barely straighten their frozen hands. Afterward, his grandfather gave the pair less that 90 cents to split.
  5. Watch Small Expenses: Buffett invests in business run by managers who obsess over the tiniest costs. He once acquired a company whose owner counted the sheets in rolls of 500-sheet toilet paper to see if he was being cheated (he was). He also admired a friend who painted only the side of his office building that faced the road.
  6. Limit What You Borrow: Buffett has never borrowed a significant amount – not to invest, not for a mortgage. He has gotten many heartrending letters from people who thought their borrowing was manageable but became overwhelmed by debt. His advice: Negotiate with creditors to pay what you can. Then, when you’re debt-free, work on saving some money that you can invest.
  7. Be Persistent: With tenacity and ingenuity, you can win against a more established competitor. Buffett acquired the Nebraska Furniture Mart in 1983 because he liked the way its founder, Rose Blumkin, did business. A Russian immigrant, she built the mart from a pawnshop into the largest furniture store in North America. Her strategy was to undersell the big shots, and she was a merciless negotiator.
  8. Know When to Quit: Once, when Buffett was a teen, he went to the racetrack. He bet on a race and lost. To recoup his funds, he bet on another race. He lost again, leaving him with close to nothing. He felt sick – he had squandered nearly a week’s earnings. Buffett never repeated that mistake.
  9. Assess the Risks: In 1995, the employer of Buffett’s son, Howie, was accused by the FBI of price-fixing. Buffett advised Howie to imagine the worst- and best-case scenarios if he stayed with the company. His son quickly realized the risks of staying far outweighed any potential gains, and he quit the next day.
  10. Know What Success Really Means: Despite his wealth, Buffett does not measure success by dollars. In 2006, he pledged to give away almost his entire fortune to charities, primarily the Bill and Melinda Gates Foundation. He’s adamant about not funding monuments to himself – no Warren Buffett buildings or halls. “When you get to my age, you’ll measure your success in life by how many of the people you want to have love you actually do love you. That’s the ultimate test of how you lived your life.”

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Crush the Triangle of Triple Constraints

When performing a service, the provider is often times caught in a quandary between price, time, and quality.  The Triple Constraint Theory of Project Management states that one is given the options of Fast, Quality and Cheap, and told to pick any two.  This triangle reflects the fact that the three properties of a service are interrelated, and it is not possible to optimize all three – one will always suffer. This dilemma is no different in operating a small business; the owner can’t be everything to everybody so the question becomes how you can manage this issue.  In order to further expand and relate this issue, a colleague of mine (joshorourke.com) illustrates this concept with Mexican restaurants and since I love Mexican food this applies.

  1. Cheap = Taco Bell
  2. Quality = Authentic Mexican Restaurant
  3. Fast = Moe’s Southwestern Grill

If you want to provide a service cheaply in order to gain economies of scale, then Taco Bell is the model.  This method provides inexpensive products with occasional inferior ingredients/service but the customer gets what they want a fast, cheap meal to go.  However, if you wish to provide a service with a fast turnaround time to move customers through the pipeline then Moe’s Southwestern Grill it is.  Everyone loves the greeting of “Welcome to Moe’s,” have food prepared quickly in front of you, and then off to your seat to devour the food.  Lastly, you can pattern the service to deliver high quality products that provide value to the customer, which would relate to an Authentic Mexican Restaurant.  Imagine sitting at a table prepped with fresh chips and salsa, ordering a wicked awesome chimichanga, and maybe a side of guacamole while listening to a Mariachi band.   In the end, all of these options have their place and purpose; unfortunately we can’t fully combine all three aspects to make the definitive perfect product/service.

  1. Provide a service/product fast and to a high standard, but then it will not be cheap.
  2. Provide a service/product fast and cheaply, but it will not be of high quality.
  3. Provide a service/product with high quality and cheaply, but it will take a long time.

How will you choose to portray and develop your product or service?  It is not a quick and easy solution, especially when you are just starting a business and need clients yesterday.  The trick is to understand your audience or clients and give them what they expect.  Setting this direction for your business is a direct reflection of your goal and vision development process.  Once you have established a vision for your company then you can use it as “kiddy bowling-lane buffers” to keep your company on course, moving toward the goals, and not toward the next distracting shinny object.

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