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MAKING SOME SENSE OF WHEN STATE TAXES & CHARITABLE DONATIONS ACTUALLY BECOME A TAX BENEFIT...
DEAR PEOPLE PAYING TAXES TO THE USA!
All people independent contractors, dashing freelancers, warrior employees of big corps!
Please read this tax lingo to digestible lingo translation to understand if state tax and/or making a charitable donation will become a tax benefit to you in 2017. It will also shed light on how this may change for 2018.
First create a visual in your mind or on a piece of paper.
Imagine two swimming pools.
There’s the standard community swimming pool and the elite customized swimming pool (aka an itemized pool).
This is capitalism people, if you haven’t caught on, it thrives on elitism.
BOTH of these pools are used to LOWER the amount of money on which you pay FEDERAL tax. Right now anyone can use the standard pool.
In 2017, The standard community swimming pool is full of $6350.00 for single folks and
$12,700 for married folks.
(The Trump Tax Overhaul from here on out called “TTO” is expected to double the amounts in the standard pools starting in 2018 but only for a limited time...kinda like a fast food promotion that will taste good at first then make you feel sick later.)
In 2017, the elite customized pool is available for you to fill with certain elite type things.
If you want to build your elite pool, you need to make sure you can make it bigger and fuller than $6350.00 for single folks and $12,700 for married folks.
How do you do that? Below is the in general, quick list of things that can fill your elite pool, if you want to learn more then read the detailed descriptions further down the page!
THE QUICK LIST: State Taxes paid through the year, Charitable Donations, Real Estate Tax and Mortgage Interest, Unreimbursed employee expenses, and in some rare cases uncovered medical expenses.
STOP HERE! If none of these terms exist together in your financial life, then VERY VERY unlikely that your CHARITABLE DONATIONS will become a tax benefit. PLEASE do give regardless of this fact, your fav non-profit orgs DO need your help!!
More detailed explanations below:
STATE TAX: Most people start filling their elite itemized pool,by paying large amounts of state tax through their W2 job. Say you, a single person, paid more than $6350.00 in state tax within the calendar year. Blamo! you’re automatically building an elite pool. This is an advantage high earners in Blue states have grown accustomed to and it’s one of the things the “TTO” intends to take away. Large amounts of SALES TAX can also apply here, like if you bought that Cadillac outright and paid a ton of state sales tax on it...
CHARITABLE DONATIONS: The donations you make become a tax benefit only if they help make your elite pool bigger than standard options. Say you, a single person, paid $7000 in state tax and then donated $1000 to planned parenthood… Now your elite pool is $8000. You will now subtract $8000 off your income before your FEDERAL TAXES get calculated. Other subtractions might happen before this but that’s for another article.
REAL ESTATE TAX AND MORTGAGE INTEREST: The incentive to own shit and pay out the nose to be in certain neighborhoods and tie your life to owning stuff! Add it to the elite pool deduction! Buy the house with the built in pool! Throw a party! Only invite your friends! Middle Income folks and small time real estate investors have grown accustomed to this and it’s one of the things the “TTO” intends to limit. Way to help the middle class!
UNREIMBURSED EMPLOYEE EXPENSES (This is going away after 2017): This one gets complicated. Say you work for a company, they pay you on a W2 and you need to have a cell phone to be reached at any hour of the day. The company won’t give you a phone, so you need to use your own AND they don’t pay your phone bill. Now you’ve got an unreimbursed employee expense. You can add these expenses to your elite pool BUT they have to clear a hurdle before they can jump into the pool. What hurdle? Well you need to spend more than 2% of your total income. So if you’re totaled income is $100,000... 2% of $100,000.00 = $2000. Only the dollars you paid ABOVE the 2% can come into the pool. So if you racked up $2500.00 of unreimbursed expenses then $500 joins the party. Get it? One of the things the “TTO” intends to take away except for military people.
MEDICAL EXPENSES: This one gets more complicated. I tell my clients not to aim for this elite territory. Let’s say you have health insurance, but some medical expenses weren’t covered by your insurance. You can add these expenses to your elite pool BUT they have to clear a hurdle before they can jump into the pool. What hurdle? Well you need to spend more than 10% of your total income. So if you’re totaled income is $100,000...10% of $100,000.00 = $10,000. Now again ONLY the dollars you paid ABOVE the 10% can come into the pool. So if you racked up $15000.00 of unreimbursed medical expenses then $5000 joins the pool. Get it? See why it sucks? Don’t join this club! But if you’re in it... then let’s make it work for you! One of the things the “TTO” tried to take away but seems to have gotten re negotiated to make it easier to take advantage of by lowering the hurdle to 7.5%.
CASUALTY AND THEFT LOSSES: Also sound terrible right? We don’t want to join this club either but if you have these losses they can join the pool.