SOME TRULY BASIC TAX BASICS

Let me review some truly basic tax “stuff” – things that I would have thought everyone knows, but still get questions about.

(1) Your filing status for the tax year is determined by your status on the last day of the year – December 31^st. 

a. If you are legally married on December 31, 2019, even if your wedding was December 30, you must file your 2019 tax returns for as either Married Filing Jointly or Married Filing Separately. 

b. If you are legally divorced on December 31, 2019, you must file your 2019 tax returns as either Single or Head of Household.

(2) If a person is alive for at least one day of the year he/she is considered for tax purposes to be alive for the entire year, and receives all the appropriate tax benefits, whether a dependent or an independent filer, for the entire year. 

a. If your spouse passes away at any time during the year, including January 1st, you can file as Married Filing Joint for that year. 

b. If a child is born at any time during the year, including December 31st, you can claim that child as a dependent, with all the applicable tax benefits (Child Tax Credit, Earned Income Credit), for that year.  

c. If a child is born on May 1st and passes away on May 2nd you can claim the child as a dependent for that year.

(3) You will only receive a tax benefit for an expense or action that qualifies as an itemized deduction if you itemize your deductions by filing a Schedule A – if your total itemized deductions exceed the applicable Standard Deduction amount for your filing status and situation.

Charities advertise that you can get a tax deduction for donating your car to their organization.  This statement is true – but only if you are able to itemize. 

If you donate a car with a deductible value of $2,000 to, for example, Kars 4 Kids, and you are in the 22% federal tax bracket and -

a. you itemize on Schedule A, and the full amount of the $2,000 deduction is in excess of your Standard Deduction, you will put $440 in your pocket (plus any state tax savings).   $2,000 x 22% = $440.

b. your total allowable itemized deductions, including the $2,000 for the car, is $11,000 and your Standard Deduction is $12,200 (the Standard Deduction amount for a Single filer for 2019) you put absolutely nothing in your pocket – you get no tax benefit from donating your car to the charity.  $11,000 less $12,200 = $0.00.

c. your total allowable itemized deductions, including the $2,000 for the car, is $13,000 and your Standard Deduction is $12,200 you out only $176 in your pocket (plus any state tax savings).  $13,000 less $12,200 = $800 x 22% = $176.

The above item (3) is actually inspired by a true story from my practice.  Years ago, a client came to see me and was happy as a pig in reality tv.  She said she had donated her car to charity and was told she would get a big tax deduction.  She could not itemize, even the car deduction, and got zip.  Clearly, she was not pleased.

TTFN