Tax Law Blog | IRS Tax Attorneys

Our suburban neighborhood held our annual garage sale event this weekend. Rather than have 100 yard sales scattered across 100 Saturdays and Sundays, everyone puts out their junk on the same day.

The hubby and I actually find it pretty annoying. We don’t participate, either as sellers or buyers, although I have been tempted to wander down the block and see what items my neighbors are trying to unload.

But the big issue for us is that we get up much later than our neighbors, on both weekends and week days. We’re used to our commuting neighbors’ cars cranking up too early Monday through Friday, but once they’re out of the driveways, we can go back to dozing.

With the garage sale, however, it’s a steady stream of vehicular noise starting at 8 a.m. on Saturday. I don’t know how some of these folks’ cars pass their safety and emission inspections, given how their vehicles obviously don’t have mufflers.

But I digress. And at least, as I mentioned, it’s just one weekend a year. And it’s over. So now we’ve got 51 other less noisy weekends ahead of us.

Annual garage sale tax query: Along with the community garage sale each year,  I also get the same tax question. Do I have to pay taxes on the money I made from unloading all my unwanted stuff?

Sellers, you are in tax luck.

Although the IRS has a reputation for trying to get a piece of just about every cent we bring in, when it comes to the occasional garage or yard sale, you generally do not have to report the sales amounts as income.

The reason? In such sales, you’re generally selling household items you purchased over the years and used personally. More to the tax point, you’re selling them for less than you paid for them.

In discussing sale of personal items in Publication 525, the IRS says, “if you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain.”

The key phrase here is “capital gain,” and that’s underscored by the example the IRS offers:

You sold a painting on an online auction website for $100. You bought the painting for $20 at a garage sale years ago. Report your $80 gain as a capital gain on Schedule D (Form 1040).

But most items sold at garage sales and the like don’t bring in more than what you paid for them. In fact, in most cases your total take for all yard sale offerings will be far less than what you originally paid

Some folks also point out that when you bought the items, you probably paid sales tax on them so taxing any money you make off them would be double taxation. But that’s not really a concern of the IRS, since the sales taxes are state levies.

Is it a business? However, if you make a living via garage sales and, more often nowadays, buying items and then reselling them on eBay or another online auction site, be careful.

You’ve entered business territory and you could be liable for income and self-employment taxes on your sale proceeds.

But for the once or twice a year attempt to turn your trash into another person’s treasure, no worries. Just do your night-owl neighbors a favor and don’t welcome bargain shoppers until 10ish or so.

The Tax Guru, CPA Kerry M. Kerstetter, has more on taxes and garage sales in his post eBay Auctions and Garage Sales.

Consider charity instead: As yesterday’s garage sales wound down, I noticed a Salvation Army truck on our block.

Either some neighbors called the charity to pick up items that didn’t sell, or the truck was simply cruising the community looking for people who didn’t want to schlep unwanted stuff back inside their houses.

Either way, donations are a good way to dispose of property you no longer need or want. And if you itemize, you can deduct the fair market value of the goods.

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If you missed out on last year’s tax rebate or did not receive the full amount because your income was too high, you may get a second chance. “The Recovery Rebate Credit should not be overlooked,” says Mark Steber, vice president of tax resources for Jackson Hewitt. “You may be due more money when you file your 2008 taxes,” Steber adds.

The first round of rebate checks, which were mailed directly to eligible taxpayers, was based on 2007 tax return information. Rebates are reduced for single taxpayers with more than $75,000 in adjusted gross income. For joint filers, the phase-out begins at $150,000.

If your income has changed since 2007 — perhaps due to a job loss or a reduction in investment earnings — you may qualify for a credit of up to $600 if you are single and up to $1,200 if you are married. Or, if you had a baby or adopted a child in 2008, or if you are a divorced parent who claims a child as a dependent every other year, you may qualify for a tax rebate of up to $300 for an additional child under age 17.

With more than 11 million Americans unemployed, it’s a good bet than many will qualify for additional rebate money, says Mike Martin, president of Mike Martin & Associates in Independence, Missouri.

Any amount you receive based on 2008 tax information would be offset by what you have already received based on your 2007 tax returns. So, for instance, if you are single and received $200 out of the potential $600 rebate, you may be eligible for an additional $400.

The only way to receive a new or additional rebate is to claim the Recovery Rebate Credit on your 2008 tax return on line 70. The IRS provides a two-page worksheet in the 1040 directions as well as a calculator at IRS.gov to help you determine if you are eligible to claim a rebate. If you’re not up to doing the math, you can instruct the IRS to calculate the credit for you by entering “RRC” next to line 70.

If you qualify for a rebate, don’t expect to receive a check in the mail. It will be added to any refund you are due or will reduce any tax bill that you owe.

Even if you already received your rebate check last spring and aren’t entitled to any additional money, you benefit, too. The money you received is not taxable, and if your 2008 income increased about the levels that make you ineligible for a rebate, you don’t have to give it back.

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While hunting for a job most expenses are tax deductable. Some examples are as follows:

* Paper, preparation expenses and printing for your resume.
* Stamps to send out your resume.
* Online expenses to post your resume (on monster.com, for example)
* Fees paid to employment agencies
* Travel to and from interviews.
* Long distance calls to prospective employers.
* Costs of getting a portfolio or other work samples together.

There are some caveats. You can’t deduct the cost of looking for your first job in a particular profession. Sorry new grads, you’re out of luck - it’s just the rule!
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If you’re unemployed, your tax bill will probably decline:

Deduction for medical expenses. Co-payments, deductibles and other unreimbursed medical expenses are deductible only if they exceed 7.5% of your adjusted gross income.
The income cut-off prevents most people with jobs and employer-provided health insurance from deducting medical expenses. But if your income has declined and you’re paying more for health care, the threshold could become easier to cross.
Under a federal law known as COBRA (Consolidated Omnibus Budget Reconciliation Act), you can continue your former employer’s coverage for at least 18 months. To maintain coverage, though, you must pay the entire premium, plus an administrative fee. These expenses qualify for the medical expense deduction, says Leslie Laffie, tax analyst for Thomson Reuters.

Many employees who can’t afford COBRA opt instead to buy an individual insurance policy. Premiums for these policies are also deductible, Laffie says. And if you’re required to pay a specific amount out-of-pocket before your insurance kicks in, those payments also count toward the medical expense deduction.

Miscellaneous itemized deductions. Expenses that fall into this category include tax preparation costs, safe deposit box fees and — significantly, for unemployed people — job search expenses. To claim this deduction, your combined miscellaneous expenses must exceed 2% of your AGI, so this is another break that becomes more accessible when your income has declined.

Your can deduct job-hunting costs even if your search was unsuccessful, Laffie says. However, you must seek a job in the same business or trade where you were previously employed to deduct those costs.

“If you were a teacher, you have to be looking for a job as an educator, vs. looking for a job as an engineer or accountant,” she says.

Deductible job-hunting expenses include résumé preparation, unreimbursed travel for job interviews, long-distance calls to potential employers and subscriptions to job-search websites, Laffie says.

Earned income tax credit. This tax credit is designed to help low- and moderate-income families offset the cost of paying Social Security taxes. For 2008, the maximum earned income tax credit for a married couple with two children is $4,824.

Last year, the IRS provided $48 billion in EITC payments to 24 million Americans, IRS Commissioner Doug Shulman says. Still, the IRS estimates that more than 20% of taxpayers who are eligible for the credit don’t claim it. That percentage could be even higher this year because of the economic downturn, Shulman says. “There may be a whole set of taxpayers who have never been eligible for EITC who this year are eligible,” he says.

In general, a married couple with two children is eligible for the EITC if their 2008 AGI was less than $41,646. If you’re eligible for the federal credit, you may also qualify for a similar credit from your state or local government. Twenty-two states, Washington, D.C., and Montgomery County, Md., offer residents an earned income tax credit. To find the complete list, go to www.irs.gov and click on “Earned Income Tax Credit.”

IRS Taxpayer Assistance Centers at about 170 locations around the country will be open Saturday, Feb. 21, to assist EITC-eligible taxpayers who can’t visit one of the centers during the workweek. To find the addresses and hours of these centers, go to the IRS website and click on “Contact My Local Office.”

While unemployment will lower your tax bill, it may not fall as much as you expect. That’s because the IRS treats unemployment benefits as taxable income, and some states do, too.

Most states allow you to have taxes withheld from your unemployment benefits, which are documented on form 1099-G. If you have other sources of income — such as wages from a spouse’s job — having taxes withheld might be a good idea, says Robert Seltzer, a certified public accountant in Beverly Hills.

But if unemployment benefits are your sole source of income, it’s probably not necessary, Seltzer says, because you probably won’t owe much — if anything — when you file your taxes. The Senate version of the economic stimulus bill would exclude up to $2,400 in unemployment benefits from taxes in 2009.

Contact the National Tax Firm of Ken Sheppard with help taking on the IRS.

Make sure to get your maximum refund. Why should the IRS get to keep a penny of your money?

For 2007, you got to take off as much as $3,400 from your income for each qualified exemption you have, up from $3,300 in 2006. (The level rises to $3,500 in 2008.) Despite myths to the contrary, these include children who are full-time students under age 24, regardless of how much income they may have. As your income increases, your exemption deduction may decrease. For 2007, on a joint return, your exemption deduction were phased out between adjusted gross income of $234,600 and $357,100.

For singles, the numbers are between $156,400 and $278,900. With the exemption rising in 2008, the phaseouts increase as well.

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Steve Bennett, president and CEO of Intuit, the maker of the TurboTax software program, reports this one:

A client gave away his house to a local fire department to burn up in a training exercise. So far, so good. It appears to be a legitimate, allowable charitable contribution that was made to an appropriate organization.

But here’s the kicker: The value of the property actually went up once the house was removed.

Because the value increased, sorry, there could be no deduction.

More on this story.

What a bummer, huh? Find a Tax Lawyer at the tax law directory.

Charity, as I hope everyone remembers, begins with a tax deduction. If you didn’t have the cash to contribute in 2007, I hope you charged it. And, likewise, if you don’t have the cash when it comes time to contribute in 2008, go ahead and charge it. The deduction is allowed in the year of the charge, not when you actually pay the bill.

Get a receipt from the charity to which you made a donation, and, if you’re still worried about documentation, get the credit card company to send you their record of the transaction.
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Bank basis point donations will be made as a fixed, relatively small percentage of each credit card transaction.2 Cardholders will have the ability to designate a charity or charities to receive these donations, and will be notified of the amounts of these donations in an annual or semi- annual statement (Statement).

Unlike rebates these amounts will not be available to cardholders and will not be deductible by cardholders as charitable contributions for tax purposes. Explanations of the basis point component of the Program, and any Statement furnished to cardholders showing the amount of their basis point donations, will state that they are not deductible.