Ep. 122 | ACE Series: Schedule A
Download MP3Hey, everybody. And welcome back to the Teaching Tax Flow podcast episode 122. Today, we are kicking off our ACE series. So it's a three part series. In part one today, we are diving into schedule a. But before we do that as always, let's take a brief moment and thank our episode sponsor.
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John Tripolsky:Hey, everyone. Welcome back. And as you heard in the intro here, we are kicking off our ACE series. So ACE, if you're I don't even know if they're outside of Michigan, this area, but ACE, you know, ACE is the place. It's the hardware store.
John Tripolsky:So if you're familiar with that, you get my little joke there. If not, I apologize. Skip over it. You don't wanna rewind it because it was corny, but we'll deal with it. So as as we dive into here on part one of three, again, as mentioned in the intro, we are looking at schedule a.
John Tripolsky:So what is a schedule a we're gonna get into specifically? Chris here, my counterpart, I should say. He has a much better hairdo than I do. My word. If you're watching this, you know what I'm talking about.
John Tripolsky:If you're not watching this on YouTube and you're only listening to it, you need to get on there. You need to watch it. So go subscribe. Check out the podcast. This is a hundred and 22 episodes in.
John Tripolsky:That means for 22 of them now, we've been doing video. So, again, if you are a avid podcast listener, you now have the, the video option. So as we get into Schedule a here, Chris, I'm I look forward to running through this because I know there's a lot of these. You know, a lot of our our audience uses them. So, yeah, let's dive through this.
John Tripolsky:If you don't have one of them in front of you, if you are listening, just Google it. Schedule a form ten forty IRS. You'll get a copy of it, and you can look at this while we're going through it as well.
Chris Picciurro:Yeah. I mean, the so I'm really excited about this ACE series. Schedule a, schedule c, schedule e, by far the most popular schedules within the teaching tax law community. I would say, you know, if you look at these these schedules, more than 50% of people in the teaching tax law community file at least one of these schedules. So remember, like you said, John, these are not separate forms or rather yeah.
Chris Picciurro:They they're not separate, tax filings on their own. They're part of someone's personal tax return or a ten forty. However, they are very, very important attachments. So let's talk about itemized deductions. Before we jump into itemized deductions, let's remember something.
Chris Picciurro:Every taxpayer, alright, based on their filing status gets a standard deduction. Now for, for 2024, that amounts about $28,000 married joint, about $21,000 head of household, and about $14,000 for married filing separately or single. So you get that deduction no matter what. But for many, many taxpayers, they have a bunch of personal expenses that if you add them up, it's more than that amount, and you get to take those itemized deductions. And then on some states, you can itemize as well.
Chris Picciurro:So could but we're gonna focus on the federal side of things. So let's talk through our most common itemized deductions. Like I said, John's schedule a. We'll put a link to this form in the podcast. Oh, by the way, if you haven't watched us on YouTube yet, first of all, if you're tuning in for the first time, one, we're sorry.
Chris Picciurro:We're sorry. We're just we're sorry, John and I, aren't better looking. We probably sound a lot better than we look, and you're probably grossly disappointed right now. But that should not preclude you from still subscribing and liking this YouTube channel.
John Tripolsky:There you go. And and, you know, Chris, I just realized something. I think for every one of these episodes we've ever done, including the ones that weren't on video, I think I've actually worn a hat for. Speaking of hairdos, maybe one day I'll convince you to wear a hat, and I'll actually do my hair. Maybe we'll show
Chris Picciurro:you a little bit. Teaching tax flow hat or maybe maybe my Michigan State Spartans, my Detroit Tigers, or my Tennessee Titans actually win some type of championship, and I will then don one of those hats.
John Tripolsky:Or I can just wear a Detroit Lions one or a Michigan Wolverines one, and then you won't record it with me. So one of the two. So
Chris Picciurro:Well, I'm not worried about either of them winning a championship in the near future. So let's move on to schedule a, itemized deductions. The first, the most very common itemized deduction are gonna be your medical and dental expenses. So medical and dental expenses, what you do is you add those out of pocket expenses up in the amount that exceeds seven and a half percent of your adjusted gross income. You'll hear that term called AGI quite a bit.
Chris Picciurro:The amount that exceeds 7% seven and a half percent of your adjusted gross income is deductible. So for instance, if your AGI is a hundred thousand dollars and you have $10,000 of medical expenses, well, seven and a half percent of a hundred thousand, 70 5 hundred, you would be able to take that $10,000 of expenses, minus 775 hundred dollars, you'd get a deduction for $2,500 of of medical and dental expenses. So that's gonna be a very common itemized deductions. I do wanna say another thing, John, as you as you well know. I know this sounds like we're plugging we're plugging in the teaching tax flow YouTube channel, etcetera, etcetera.
Chris Picciurro:We have a ton of content on that on that channel on all of these things we're gonna talk about today. Be it a one minute quick tip or an a whole separate I mean, we've got a whole separate podcast just on medical expenses.
John Tripolsky:Mhmm. Mhmm. So Which was a good show, by the way. I enjoyed doing that one, and I know that's one of the ones that I personally walked away. I'm like, wow.
John Tripolsky:Like, did did not know that. So it's and if I remember right, Chris, too, actually on that 10:40, or on the schedule a, it actually says right next to it, that seven and a half percent. Right? So it's
Chris Picciurro:not like
John Tripolsky:you have to have to guess at it and remember this specifically.
Chris Picciurro:And your my yeah. My advice is if you're using software, just put your medical expenses in the software and let it you know, you never know. Sometimes it could it could be close. So the next the next deduction are taxes that you've paid. The state and local.
Chris Picciurro:You hear this all the time, John. I know you're not you don't come from a tax background, but SALT tax. Right? What in the heck is SALT? State and local tax.
Chris Picciurro:Okay? And with the tax cuts and jobs act, that SALT tax deduction was limited to $10,000. Previously, it was unlimited. I mean, you you would have, you know, if you had $50,000 of state and local income tax, you would actually get to deduct all that. Now Tax Cuts and Jobs Act is in the process of potentially phasing out.
Chris Picciurro:We have a ton of content on when we had the presidential election of twenty twenty four and what the candidates are running in. But as of the time of this recording, $10,000 for married joint, $5,000 if you're married separate, is the SALT tax limit. So what is SALT and then head of household is $10,000, single is $10,000. Well, SALT means a couple of things. One, property taxes.
Chris Picciurro:Two, any type of state and local income tax. So, John, you have the pleasure of living in the in the great state of Michigan, the winter wonderland state. I'm trying to think of all of the,
John Tripolsky:Great Lakes
Chris Picciurro:State. Yeah. The Great Lakes. I love I love, though, the Great Lakes State. I mean, that's just probably my favorite way to describe Michigan.
Chris Picciurro:And so you have a state income tax. Well, I'm here in the volunteer state, and some call it God's country, but we won't go down. It's a different podcast. And there is no state income tax. But so any state income tax you pay, any personal property taxes you pay that are ad valorem.
Chris Picciurro:What that means is that if you're if the tabs you pay for your vehicle or RV or or, you know, any of your toys, that you have are based on the value of it, then that's deductible. Like I said, property taxes is another very common, state and local tax that you would pay. And then some people work in the city that there's a city tax. So you add those up, and that's part of your itemized deductions. Now if you own a business and you pay a significant amount of state and local tax because your business is very profitable, definitely reach out in the teaching tax or in our defeating taxes private Facebook group.
Chris Picciurro:You're gonna wanna educate yourself about PTET, which is separate from this, but I'd be remiss if I didn't mention it. I'd probably have my friends that are tax professionals that listen to this. Call me, text me, and holler at me for not mentioning, the the PTET potentially, which is a pass through entity tax election. So that's that's part two of Schedule a, taxes that you paid. Part three, interests that you pay.
Chris Picciurro:Now for interest, remember, tax laws are in encouraging, discourage certain behavior. So the the mortgage interest that you pay for a qualified home loan is deductible. That's a huge expense. When we talk about the benefits of homeownership, one of the main benefits is my mortgage interest is not deductible. If I paid rent to someone, I wouldn't be able to deduct that as an itemized deductions.
Chris Picciurro:Now with the tax cuts and jobs act, there are some limits to qualified home loan deduction. So for any mortgages taken out after December fifteenth of twenty seventeen, only the mortgage interest that applies to loans up to $750,000 is deductible. And if it was before 12/15/2017, it's up to a million dollars. So let's say, John, you end up building the Casa Dei Trypolsky. Right?
Chris Picciurro:You take it's $2,000,000 property, and you take a mortgage for $1,500,000. In that case, 50% of your mortgage interest would be deductible on the federal return because that's up to $750,000 of of mortgage, and you track that. So, you know, your tax professional is gonna track that for you. We have several people in our private CPA practice that exceed that, you know, exceed that limit. I will say if you have rental properties, oh, I'm not hold on.
Chris Picciurro:You're gonna wanna tune in to to the third part of this, which is schedule e. Mortgage interest deduction for rental properties is completely different than than your primary residence or potentially even a second home. You know, it could be a cottage or or a, could be a boat with a bathroom. You know, there's a lot of different second qualified second dwellings. And then home equity loan interest is deductible if it's used for home improvements.
Chris Picciurro:Very transparent, John. We built a and if you listen to this, we built a garage apartment, has my office here. It has a second bedroom that is the John Chapulski suite, for when you visit, Franklin. We've got a kitchenette. Anyway, for a portion of for for some of this build out, we used a home equity line of credit.
Chris Picciurro:Just it was just easy. And, and that's deductible because I used it for home improvement. Okay? So points that you pay in your mortgage are deductible in the year that they're paid for primary residences. And then investment interest is deductible, up to the amount of investment income.
Chris Picciurro:So, John, if you let's say you, you know, you you have, you have an investment that's producing income, but you did use a loan to purchase that. So and you're paying interest on that loan, you could deduct that. That's very common when you have, let's say, business ownership transition. So, John, let's say you're selling me your business and you're doing owner financing, and I'm you know, I was a stock sale. I would have interest on that stock.
Chris Picciurro:So
John Tripolsky:Yeah. And it is it is interesting to see how all of it kinda, you know, mind mapping this, if we will, how they tie together. Right? So maybe and I'm just making an assumption or a a simple observation from the outside looking in is, you know, the IRS, when they were creating this form, they probably looked at it as, okay. We'll allow a deduction.
John Tripolsky:We'll take a HELOC, you know, home equity line. We'll we'll allow that deduction because it's gonna be made up in other places. You know what I mean? Like, your your taxes are gonna go up or or something's just your, you know, your value behind just kinda thinking and, you know, looking at this form and seeing how everything's interconnected. I can only imagine how that planning process went.
John Tripolsky:Right? When they're like, hey.
Chris Picciurro:Let me
John Tripolsky:create this form. What should we allow?
Chris Picciurro:Yeah. I mean, it comes down to congress. You know, congress is they're they're the lawmakers, and they're gonna have they have, yeah. Remember, we did an episode with, with LaShawn and and from the Michigan Association of CPAs called how taxes are made, and we talk about the whole process of how how something becomes tax law. Right?
Chris Picciurro:There's there's different committees. There's a senate finance committee. There's a and on the federal level, there's a there's a house, ways and means committee, and they are kinda underwriting any of these tax bills. So I will point out on interest also. If you any of the investment interest, you're gonna have to file a form forty nine fifty two form, and that gets attached to schedule a.
Chris Picciurro:And it is very common, John, that you so when you have a mortgage, typically, the mortgage company is gonna issue you a ten ninety eight. That's the form that gets you the mortgage interest. But let's say that you bought something, out of seller financing and and that wasn't reported on a form ten ninety eight. That's okay. You could still deduct it.
Chris Picciurro:We're just gonna need the name and Social Security number of the person you paid the mortgage to and the address, and we're gonna be able to put that on schedule a as well. Excellent.
John Tripolsky:So it's so it's very similar to filing a, a ten ninety nine or assuming a ten ninety nine. Exactly.
Chris Picciurro:It's a defacto ten ninety nine.
John Tripolsky:Perfect. Perfect. K. That makes total sense.
Chris Picciurro:So the next big section, our fourth big section on schedule a is going to be gifts to charity. And gifts to charity are broken into two different categories. Right? One are gonna be cash or check. That's really straightforward.
Chris Picciurro:One of them is going to be noncash donations. That could be gifts of clothing and, vehicles and whatever you any type of property that's not cash that you donate, you could still deduct it for the fair market value. Now there are special rules when it comes to gifts to charity, especially for non cash donations. What you need to know is that noncash donation let's start with cash donations. Cash donations could are deductible for up to 60% of your adjusted gross income as long as they're going to qualified organizations.
Chris Picciurro:So when you're you know, we get a lot of questions in teaching textile community like, hey. I've I gift you know, I gifted my cousin who was kinda down on his luck, and I gave him a thousand bucks. Do I get a deduction for it? Unfortunately, that's considered a gift, and it's not deductible. You know what?
Chris Picciurro:You probably got on Santa's good list for giving your cousin some money. Good for you. So cash contributions. Non cash contributions, you get a deduction, like I said, for up to the fair market value of the contribution. And if your donations are over $250, you do need a written acknowledgment from the charity that is required.
Chris Picciurro:And if your noncash donation exceeds $500, you have to file a form eighty two eighty three. And then special rules apply to property worth more than $5,000 where you're typically gonna need an appraisal. So, John, just real life, it's like kids like to say IRL. Right? I one of my goals for the new year was, like, I'm gonna clean my closet out.
Chris Picciurro:I have a bunch of old clothes. It's sad, John. You know, I like, a a memory come up on Facebook from eight years ago, and I'm like, I still have the same jeans and the same ratty shirt. You know, I've got a I'm not buying anything now until I get rid of. And now I have my closet you know, I've got every color teaching tax flow shirts, so now I've gotta make a room for it.
Chris Picciurro:And, and that hat that we're gonna get me. But, so I I took about yeah. We got a little snow here in Franklin, Tennessee where I'm at, which is very rare. We got, like, four inches of snow, and I'm like, we're all trapped here. I'm gonna actually go through my closet, and I I had seven huge bags of clothing that I was that I donated, to a nonprofit organization.
Chris Picciurro:And I really looked at it, and I'm like, I've got over $500 worth of stuff. So I actually, went, got a receipt, documented it, and, so it's kinda neat when some of these rules apply your to your to your life. So Yeah.
John Tripolsky:So even, like, you know, we we talk about gifting. So what like, maybe walk us through our our real example. Right? Like, say you have a vehicle that's worth $25,000 or $35,000. It's from a family member, aunt, uncle, mom, dad, anybody.
John Tripolsky:So walk us through that a little bit, how that would work. So I know you mentioned at certain points, there's there's a threshold, then there's an appraisal. So how does that work a to z?
Chris Picciurro:Yeah. Vehicle so vehicle deductions are are, very unique, and they have special rules. So it might go beyond is there's a lot of we could maybe do a whole podcast just on donating vehicles, but here's what you need to know. The first thing is, if you have a vehicle worth $30,000, you're probably better off just selling us Because the because even if you get a $30,000 deduction at a 25 percent tax rate, it's gonna pocket you $7,500 of tax benefit. So I'm just saying a lot of times now there are some times where let's say you let's say you had a vehicle and you there was a church or something that you really wanted that needed transportation, and they wanted that vehicle and you donate it to them.
Chris Picciurro:What would happen, basically, you get a deduction for the fair market value of the vehicle the day you donated it. There's some some serious substantiation requirements from a third party. Or if you donate it to a charity, you're gonna hear these, hey. Donate your vehicle online. Well, guess what?
Chris Picciurro:Whatever they end up selling that vehicle for is what you get the deduction for, and there's some special rules as far as eighty two eighty three form and some, you know, ten ninety eight c. So good question. Just kinda goes beyond the scope of what we're talking about here. Definitely jump taxes for that because we've got special content on that.
John Tripolsky:And I appreciate even getting into it a little bit there. And, yeah, that makes total sense because, yeah, you see a lot of those. I think one of them's, in Michigan here, it's like missus Waddles. You know, donate a boat, vehicle. Basically, anything, you know, drives or not, they, they kinda take it.
John Tripolsky:So that's how that works, which is great.
Chris Picciurro:And and there are times where your we've had situations where someone's, their donation amount is actually more than the 50 or 60% of their income. If that's and that if that's the case, then the the amount that exceeds the income threshold actually just carries forward to the next year. So it's not like it's gone gone forever.
John Tripolsky:Gotcha.
Chris Picciurro:Okay. Casually and theft losses. Now with the with the tax cuts and jobs act, this changed quite a bit. If you have a casualty or theft loss, it's only deductible if it's related to a federal lead declared disaster area. So think about, John, you know, if your, if your house burns down, unless it's in a that's unfortunate, but a lot of those losses are not deductible anymore.
Chris Picciurro:But if you are in, you know, California where there are wildfires and your house burnt down and it's a federally declared disaster area, now you could potentially take a casualty and theft loss. Or we think about our, you know, the tragedy that has occurred in Maui over the last winter. Where do I figure out if it's a freshly declared disaster area? Check out the IRS website, IRS.gov. They have a list of all of the, disaster areas by state.
Chris Picciurro:Again, not not not to beat a dead horse, but jump into defeatingtaxes.com. We have a lot of these resources for you. But if you have a casualty or theft loss in a federally declared disaster area, that is deductible on your schedule a. There's a formula. It you know, you've gotta deduct a hundred dollars per event.
Chris Picciurro:So in other words, if you're in a disaster area and you lose a $50 baseball card, you're not gonna be able to deduct that. They just there's a de minimis rule of a hundred dollars, and you and it's gotta exceed 10% of your income. So let's say, John, you you have an adjusted gross income of $50,000, and you have an uninsured $10,000 loss in a disaster, federally declared disaster area. We take the $10,000. We'd minus a hundred bucks.
Chris Picciurro:Right? That's $9,900. We take your income, $50,000 times that by 10%, I know mental math, is $5,000. So your deduction would be $9,900 minus $5,000. You get a $4,900 deduction.
John Tripolsky:Excellent. And even in defeating taxes at Facebook group, I know I don't think that we've seen any chat around the fires, west, but I know for a fact that we have had multiple discussions started, from Florida residents. And I think, like, Alabama, Mississippi with the hurricanes and the flooding that came in because, obviously, the IRS stepped in, I think, deferred some, some due dates for returns, etcetera, for that. But, like, I know there was a ton of ton of chatter on that. So it was it was good to see that some people are aware of it.
John Tripolsky:But Right. Honestly, I would bet you that eight out of 10 people don't know that that you could actually declare those losses. Declare those losses.
Chris Picciurro:Definitely talk to your tax professional. Now with the tax cuts and jobs act, unreimbursed employee business expenses are what we would call in the business sex, form twenty one zero six expenses went away. So there aren't a ton of other itemized deductions anymore. I'm gonna touch on the the the the most popular one. Now on some state returns, you could still take that on unreimbursed employee expenses, but one the most popular one are gambling losses.
Chris Picciurro:We're gonna finish with gambling losses. Gambling losses are deductible on the fed in your federal tax return. One, if you itemize, and two, up to the extent of your gambling wins. Alright. So, John, we know you you secretly go go to the horse track every Tuesday night with your friends.
Chris Picciurro:Right? All those I
John Tripolsky:like to bet on snail races. That's my thing. Right? So Dachshund racing.
Chris Picciurro:If you lost, you don't get to you'll you can deduct it if you have gambling wins and if you itemize your deduction. So gambling losses as far as the other itemized deduction is gonna be your most popular itemized. Other itemized deduction, there are some other ones that are kinda needle in the haystack things, but that's gonna be the one that, that's most common.
John Tripolsky:Well, hey. If my snail loses in my gambling adventures, at least I can turn him into a go what was it called? Escargot? Is it eating snails? If he can be converted.
John Tripolsky:They Right. Right.
Chris Picciurro:Well, you know, that's what it's called. You know, I've got the palate of an 11 year old, so I'm probably not not going into the Escargot.
John Tripolsky:So Yeah. That that is true. I don't think I've ever even seen you eat a piece of lettuce in, this
Chris Picciurro:Oh, no. I got well, I like Caesar salad.
John Tripolsky:Oh, I didn't know that. Okay.
Chris Picciurro:Oh, yeah.
John Tripolsky:Alright. I've learned something new.
Chris Picciurro:But give me some croutons. There's gotta be some croutons on it.
John Tripolsky:Cover it up. But awesome. Awesome, everybody. Well, Chris, thanks for running through that form with us. Again, we'll put the links in the show notes so you could really follow along.
John Tripolsky:We we purposely followed an order in this discussion that kind of mimicked the form itself a little bit. So if you haven't yet, you wanna go back and listen to this, print that form out, pop it up on another screen, listen to it, and kind of flow through it as well. I think you'll you'll take a lot from this. But as we wrap up here, our first part, part one of three of the ACE series, obviously, the next one, we're gonna look at schedule c. So we look forward to seeing everybody back here on the Teaching Tax Flow podcast next week.
John Tripolsky:Different time, same day of the week, but a different topic. We'll see everybody very soon. Have a great week.
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