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“When you donate at the register, that company is using your donation to fund their tax deduction.”
That’s one of many posts on social media fueling misinformation about charity at the checkout. Stores often offer customers the opportunity to support various charities at the register. Some memes, however, are suggesting that stores are misleading customers to prop up the company’s own tax returns with charitable deductions—that’s not true. (☆) The only taxpayer who may be able to claim the deduction is the customer who made the donation. However, to claim the deduction, you still have to follow the “normal” rules for making a charitable deduction, including that you have to itemize.
Outside of the register, you have options, too. If you are charitably minded and looking to minimize taxes on your retirement account withdrawals, why not consider qualified charitable distributions (QCDs)? Following the QCD rules, you can give money from your IRA directly to the charity without receiving it as income—and QCDs can count as part of your required minimum distribution each year. But pay attention to the rules: All QCDs must be made directly from your IRA. You will not get these specific tax benefits if the funds are sent to you first and then you donate to the nonprofit.
Rules and timing also matter when it comes to tax and information returns: If you’re a U.S. taxpayer and the IRS discovers an issue, the amount of time the agency has to catch you might be longer than you think. That amount of time is sometimes referred to as the statute of limitations (SOL—yes, really—for short). The SOL prescribes the time permitted to the IRS to enforce the tax rules, typically by auditing a tax return and assessing additional tax. If the length of time has run out, the IRS cannot claim additional tax is owed and assessments are time-barred. In certain cases, the SOL will be longer than others or it will not start at all. For Americans living and working overseas, SOL issues may become even more confusing than for those stateside because of some special tax rules.
In a recent case, the statute of limitations again reared its head. In Kish v. U.S., the IRS initiated an examination of a married couple’s 2020 tax year. The auditor found some issues, including foreign activities, expanded the examination, and requested in-person interviews. The taxpayers balked. The matter went to court, where the taxpayers lost—the court ruled that the IRS could lawfully inquire into years as far back as 2011 because, among other reasons, the SOL remained open if there had been failures to file. Although the IRS generally has three years from the date a return is filed to propose additional taxes, the period can be extended indefinitely until required international information returns have been filed. Kish reminds us that the scope of an examination can cover very old tax years.
And finally, if no one is returning your calls these days, they’re likely on vacation. As we all prep for our summer travel plans and vacations, one of the typical last-minute stressors to many individuals and families is whether estate plans are up-to-date. True enough, as we were boarding a plane recently, I reminded my husband that he needed to sign new documents. Despite having a wife who literally does this for a living, he hasn’t signed new documents in years. If you’ve also been putting it off, maybe it’s time to take some action.
Of course, travel is completely different these days. I’m finishing up this week’s newsletter on an airplane while my son flips through television episodes and my oldest daughter relies on her phone to catch up on some reading. These days, businesses can instantly offer products and services—like software, e-books, online courses, or digital subscriptions—to a worldwide audience. As the digital economy flourishes, governments are introducing mechanisms to capture the related tax revenue. This can include various taxes targeting remote sellers, such as value-added tax (VAT) or goods and services tax (GST) on digital services, digital service tax (DST), and withholding tax. For businesses venturing into the global marketplace, understanding these taxes and determining which ones apply to their operations is crucial.
I’ll be taking a few days to check out the local scenery while on vacation, though sadly, if the weather pattern holds, not soaking up any sun. I hope you can find some time to enjoy the season, too (just don’t forget those estimated payments—they’re due June 17.)
P.S. Remember last week’s comic book story? (☆) There’s now a video—and it’s delightful.
Kelly Phillips Erb (Senior Writer, Tax)
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Taxes From A To Z: C Is For Child Tax Credit
The child tax credit helps families get a tax break of up to $2,000 per qualifying child.A qualifying child for the 2024 tax year must meet all of the following criteria:
➤ The child must be under age 17—16 or younger—at the end of the tax year (that means that a child who turns 17 on or before December 31, 2024, would not qualify for the 2024 tax year).
➤ The child must be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, or a descendant of any of these individuals, which includes your grandchild, niece, or nephew. An adopted child is always considered your child.
➤ The child must have provided no more than half of their own support during the year.
➤ You must claim the child as a dependent on your federal tax return. The child must not have filed a joint return with their spouse for the tax year or have filed it only to claim a refund of withheld income tax or estimated tax paid.
➤ The child must be a U.S. citizen, U.S. national, or U.S. resident alien, and you must provide a valid Social Security number (SSN) for the child by the tax return due date.
➤ The child must have lived with you for more than half of the tax year (some exceptions apply).
The child tax credit is income-dependent and subject to a phase-out. For married taxpayers filing a joint return, the phase-out begins at $400,000 —it’s $200,000 for all other taxpayers. Phase-outs mean that the credit is reduced as your income increases. In this case, the reduction is $50 for each $1,000 by which your modified adjusted gross income, or MAGI, exceeds the threshold amount.
Here’s a quick example of how the phase-outs work under current law. Let’s assume that as a single taxpayer, you are entitled to a credit of $2,000, but your income is above the $200,000 threshold—it’s $201,000. Your credit would be reduced by $50 (because you’re $1,000 over the threshold amount), so your available credit is $1,950.
As your income climbs, the credit disappears. So, a single taxpayer with $240,000 in income will see a reduced credit of $2,000, bringing the available credit to zero (40 x $50 = $2,000).
The refundable portion—also known as the additional child tax credit (☆)—was worth up to $1,600 in 2023. For the 2024 tax year (tax returns filed in 2025), the child tax credit will be worth $2,000 per qualifying child, and the refundable portion will be $1,700.
There has been chatter about expanding the child tax credit, but that has not happened. Despite some very detailed posts on social media suggesting there’s a payment scheme in place, there hasn’t been any change. There was a plan that would have expanded the child tax credit retroactively which passed in the House (☆) but remains stalled (and likely dead) in the Senate.
Filing Statistics
Just over 6.4 million federal income tax returns were filed with the IRS in the 2020 tax year. The biggest sector? Professional scientific and technical services—followed by construction and rental and leasing.
In terms of collections for the 2020 tax year, corporate income tax returns made up 7.5% of collections (individuals paid 52.6% of all tax collected that year).
Questions
This week, a reader asks:
I owed taxes this year and I am confused. I am unemployed and haven’t had to pay before. Why am I being taxed?
Unemployment benefits are generally considered compensation for federal income tax purposes, which means they are taxed as ordinary income (but not subject to Social Security and Medicare taxes).
That’s long been the case. Taxpayers did get a break in 2020 when there was an exclusion from tax of up to $10,200 for benefits paid in that year. Unfortunately, that only lasted a year.
You might owe taxes this year because your benefits were higher than before, or because you have income from other sources. Typically, you wouldn’t owe tax for the 2023 tax year if your gross income was under $13,850—assuming you’re under 65 and single (you can find the thresholds for other ages and filing statuses here. (☆)).
Taxpayers who are worried about owing tax can choose to have federal income tax withholding from benefits during the year. This is similar to withholding on your paycheck and means you should owe less at tax time.
Benefits are reported on Form 1099-G. If that form sounds familiar, and you’ve never received unemployment compensation before, it’s because Form 1099-G is used to report government payments—that also include grants and state tax refunds.
If you’re worried that you might owe at tax time, you can also consider making estimated payments during the year to avoid a potential penalty.
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A Deeper Dive
Days after the Supreme Court issued a unanimous ruling in a federal estate tax matter (finding a corporation’s obligation to redeem shares is not necessarily a liability that reduces its value for estate tax purposes), the Justices entertained a new matter. (☆)In the most recent case, Diane Zilka lives in Philadelphia, Pennsylvania, and works just down the river in Wilmington, Delaware. (☆)
Pennsylvania allows residents who work out of state to claim a credit for income tax payments made to other states like Delaware. Similarly, Philadelphia also provides residents a credit to offset income tax payments to other cities. Here, Philadelphia allowed the credit for the Wilmington tax (1.25%) against her Philadelphia tax bill but didn’t allow the unused credit from Delaware (1.93%) as an offset against her Philadelphia taxes.
Zilka appealed the decision to the Tax Review Board of Philadelphia. It eventually ended up in the country’s highest court. The question that has been raised at the Supreme Court is whether the Commerce Clause requires states to consider a taxpayer’s burden in light of the state tax scheme as a whole when crediting a taxpayer’s out-of-state tax liability or permits states to credit out-of-state state and local tax liabilities as discrete tax burdens, as the Pennsylvania Supreme Court has previously held.
The Supreme Court hasn’t agreed to hear the matter—yet. They’ve asked the Solicitor General to weigh in on behalf of the United States. The case is Zilka v. Tax Review Board City of Philadelphia. Stay tuned.
Tax Filing Dates And Deadlines
📅 June 17, 2024. Second-quarter estimated payments are due for individuals for the 2024 tax year.
📅 June 17, 2024. Due date for U.S. citizens or resident aliens residing overseas or in the military on duty outside the U.S., on April 15, 2024. If you can’t file by the deadline, you can request an extension. (☆)
📅 June 17, 2024. Due date for filing FinCEN Form 114, Report of Foreign Bank and Financial Accounts—or FBAR—for taxpayers residing outside of the U.S.
📅 July 31, 2024. Due date for individuals and businesses in parts of Massachusetts affected by severe storms and flooding that began on September 11, 2023. More info here.
Tax Conferences And Events
📅 June 17-21, 2024. National Association of Black Accountants (NABA) Insight 2024 FLOW. Aria Resort & Casino, Las Vegas, Nevada. Registration required.
📅 July-September, 2024. IRS has announced the continuing education (CE) agenda for the 2024 Nationwide Tax Forum. Attendees can earn up to 19 CE credits over three days by attending one of the five forums in Chicago (July 9-11), Orlando (July 30-August 1), Baltimore (August 13-15), Dallas (August 20-22), or San Diego (September 10-12). Registration required.
Noteworthy
Vertex, Inc., a global provider of tax technology solutions, announcedthe acquisition of tax-specific AI capabilities from Ryan, LLC, a tax services and software firm. The acquisition will accelerate Vertex’s AI innovation strategy to help global companies manage tax complexity with greater speed and scale. ACCA (the Association of Chartered Certified Accountants) revealedthat its rolls recently hit 252,500, taking its membership to above one-quarter of a million for the first time. Founded in 1904 to widen access to the profession, it was the first professional accountancy body to admit women to membership. It will celebrate its 120th anniversary in November this year.
Ernst & Young LLP (EY US) announced plans to invest $1 billion over three years in talent and technology to revolutionize the experience of early career accounting professionals and improve the attractiveness of the profession. This investment includes an increase in early career compensation, artificial intelligence (AI)-enabled audit and tax platforms, a new “360 Careers” experience, outreach and support for college students, and enhanced benefits.
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Trivia
According to Forbes, when it comes to charity, which billionaire is considered the most generous in terms of dollars?
A. Warren Buffett
B. Bill Gates
C. MacKenzie Scott
D. George Soros
Find the answer at the bottom of this newsletter.
Our Team
I hope you’ll get to know some of our staff and contributors. This week, I asked our team: Do you have a charity that you regularly support? If so, what is it?
Kelly Phillips Erb (Senior Writer, Tax): I have a few favorites, including my alma mater (Meredith College) and Donor’s Choose (which helps you fund projects for public school teachers).
Mitchell Martin (Editor, Digital Assets): I like the New York Cares coat drive. It collects used but still usable coats to give to people who need them in the winter.
Steven Ehrlich (Editor, Digital Assets): ASPCA
Janet Novack (Editor, Money Team): Covenant House Pennsylvania, which serves Philadelphia’s homeless youth. There are lots of worthy youth charities, but a cousin of mine, a professor of pediatrics at the University of Pennsylvania’s medical school, is the director of its health services.
Brandon Kochkodin (Writer, Money Team): Dog shelters (Sean Casey in Brooklyn for a while, hometown SPCA).
Virginia La Torre Jeker (Contributor, Tax): This one. I’ve been involved with animal rescue work for years and despite receiving special charity rates at the vets’ clinics, the bills can run into quite an amount to get strays and abandoned pets neutered or spayed or getting medical care.
Ashley Case (Contributor, Tax): I serve on the board of Ballet Arizona. I grew up taking ballet classes, and my family would attend the Nutcracker each year. The arts, particularly ballet, will always hold a special place in my heart, so donating and volunteering has been a joy.
Andrew Leahey (Contributor, Tax): My unreserved support goes to St. Jude Children’s Research Hospital. By all accounts, they make excellent use of the money, provide a service that shouldn’t have to exist (but alas, here we are), and make the lives of folks going through the worst time in their life a little bit easier.
Key Figures
That’s the percentage of donors who say they’re more likely to donate if a match is offered, according to Double the Donation.
Trivia Answer
The answer is (A) Warren Buffett.
According to Forbes, only 11 of America’s 400 richest people have given away more than 20% of their wealth: John Arnold, Edythe Broad, Warren Buffett, Bill Gates, Melinda French Gates, Amos Hostetter Jr., Pierre Omidyar, MacKenzie Scott, Lynn Schusterman, Jeff Skoll and George Soros.
In dollar terms, Berkshire Hathaway’s Warren Buffett is the U.S.’ most generous person—he’s donated an estimated $55 billion, mainly to the Bill & Melinda Gates Foundation, as well as four charities set up by Buffett’s three children and his late wife.
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