Tax Cheat Sheet Part II - Deductions
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| Author       | Source       | 
| :-------------: |:-------------:|
|  [u/areallygoodsandwhich](https://www.reddit.com/user/areallygoodsandwhich/) | [Reddit](https://www.reddit.com/r/Superstonk/comments/nk9bv8/tax_cheat_sheet_part_ii_deductions/) | 

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[Education 👨‍🏫 | Data 🔢](https://www.reddit.com/r/Superstonk/search?q=flair_name%3A%22Education%20%F0%9F%91%A8%E2%80%8D%F0%9F%8F%AB%20%7C%20Data%20%F0%9F%94%A2%22&restrict_sr=1)

Howdy Everyone,

The Sandwhich is back for some more tax fun!

This is a continuation from my first post, [Tax Cheat Sheet Part I - Income](https://www.reddit.com/r/Superstonk/comments/niz85x/tax_cheat_sheet_part_i_income/)

I HIGHLY recommend you save/skim it over. A lot of this information builds off each other and it's easy to get lost. Don't worry there's plenty of ELIA examples throughout.

Few things first:

-   Tax is super vast. I won't know every single thing.

-   Please don't ask me to prepare your return. I don't want to use this new platform as some side hustle. It will be worth every dollar to give this to a CPA firm.

-   The Biden Administration is considering making some changes. I have no idea if/when they will go into effect, nor do I know every single thing they're considering. But I will make a note of these proposals as we go along.

-   Keep in mind that this is for Federal (Big Government) purposes. The state and cities you live in will have similar forms, but the rules and tax rates will be different.

[![r/Superstonk - Tax Cheat Sheet Part II - Deductions](https://preview.redd.it/473vn9yu25171.jpg?width=919&format=pjpg&auto=webp&s=b2a0bb9a6790254f2564f224ff3b2b2b54cece8c)](https://preview.redd.it/473vn9yu25171.jpg?width=919&format=pjpg&auto=webp&s=b2a0bb9a6790254f2564f224ff3b2b2b54cece8c)

Sarcastic Meme

Fun Fact #2: Tax refunds are NOT a good thing. A refund means you paid too much in taxes and the government owes you money. With inflation increasing, money has less purchasing power in the future. You gave given the government an interest-free loan and are receiving money that has less. But yes I understand it is fun getting money back that you didn't expect to get back :D

ELIA: You gave government too much banana. Government gives you back banana but it is mushy and brown.

Now that we've tackled income, let's talk about what everybody wants to know.

How Do I Pay Less in Taxes?

Sorry I don't have a magical answer here. There are plenty of different things you can do but it will really depend on your situation.

What I will do is walk through a basic return and point out where these are located and show the most common places. There are some crazy rich people things, but I will hold off on these for a little later. Again, you must understand some basics first.

There's one equation we're going to have to understand:

[![r/Superstonk - Tax Cheat Sheet Part II - Deductions](https://preview.redd.it/5hbiu2lmp4171.png?width=362&format=png&auto=webp&s=3280386e46cb228131ce75a46fbd9d51eb6ca44d)](https://preview.redd.it/5hbiu2lmp4171.png?width=362&format=png&auto=webp&s=3280386e46cb228131ce75a46fbd9d51eb6ca44d)

One of Many Equations

Bored? I don't blame you. Confused? Totally ok. There is a reason the world will always need lawyers and accountants. Let's break it down for the apes:

More Definitions:

Gross Income -- All of your income from Part I before taxes are calculated

Adjustments (Let's call these "Above the Line Deductions") -- Lower your income

Adjusted Gross Income (AGI) -- Income left after these deductions

This is an important calculation that will impact your deduction limits for most things mentioned here

Standard Deduction (Let's call these "Below the Line Deductions") - Lower your income

Itemized Deduction (Let's call these "Below the Line Deductions") - Lower your income

QBI Deduction -- This is for business owners. We can ignore this for now.

Credit -- kind of like a deduction but a little different

Modified Adjusted Gross Income (MAGI) -- Basically AGI but a little different. Used for Roth IRAs.

Phase-out -- You made too much money to get this deduction LOL

Tax Liability (Refund) -- how much you owe the government (how much the government owes you)

If you're feeling confused, THAT IS OK. Everyone has strengths and weaknesses. Do not try to sprint through my posts. Just know this is a college semester's worth of tax and years of accounting classes. If you're understanding this, you should be proud!

Above the Line Deductions

Here is your first round of deductions that you can use to help lower your income. Some of these may apply to you and some won't. More things will probably apply when we get to below the line deductions.

Here are the most relevant Above the Line Deductions:

-   Contributions to a Retirement Plan - Most Impactful. This needs its own post.

-   Health Savings Account (HSA) and Medical Savings Account (MSA) Contributions

-   Health Insurance Premiums

-   Student Loan Interest

-   Tuition and Fees

Edit: after looking at my whole post, I'm worried about information overload. The below the line deductions are WAY more helpful for MOASS. I will make another post later this week to cover these and a few other things. Tax is complex and I want to make these helpful and not overwhelming!

Below the Line Deductions

Your Below the Line deduction will be the GREATER of two different options:

A. Standard Deduction

This is a fixed number based on your filing status. For 2020 it is $12,400 for single and $24,800 for married apes.

B. Itemized Deduction (Schedule A)

This is a combination of a bunch of deductions. If MOASS, I highly recommend maximizing your itemized deductions to lower your taxes.

*Your CPA will know what to do.* I'm showing you how they all connect. Let's walk through these:

Medical and Dental Expenses

You can deduct medical and dental expenses that exceed 7.5% of your AGI (see I told you it was important). If MOASS, I doubt any of you will be able to use this.

Taxes Paid to You

This is capped at $10,000 max. Rich people will max this out. Let's see if these apply to you:

State Income Taxes Or State Sales Taxes:

Some states have income taxes. Some have sales taxes. Some have both. Whichever one you've spent more money on throughout the year is what will show up here. If you have a job, you probably have state taxes withheld. These will go here.

ELIA: These bananas were already taken out of your paychecks before you got them.

If you make state estimated tax payments (we will cover this in another post), these will also show up here.

Real Estate Taxes:

Do you own a house? Do you pay property taxes on it? If yes, these will all go here!

See why the rich can pay a little less in tax? Can't maximize a lot of these if you don't have money.

Personal Property Taxes

If you own a car, you pay yearly car tabs. These go here. This also applies for boats (another rich person thing)

Remember, the total of State Tax + Real Estate Tax + Personal Property Tax paid is maxed out at $10,000.

Interest You Paid

Do you own a house (This is a recurring theme)? Do you have a mortgage? All interest payments on mortgage loan are deductible! No max!

Note - this can be limited if you take out a really big loan ([Pub 936 for those curious](https://www.irs.gov/pub/irs-pdf/p936.pdf)).

Casualty and Theft Losses

These are discontinued until 2025. Ignore.

Other Itemized Deductions

These were removed by the Trump Administration.

Remember when I said state have their own rules? Some states ignore the Trump Administration's policies. For these states, **cough* *cough** California, you can still still use these.

These will still be ignored on federal but can lower your state taxes. I won't list all of them, but the most relevant one you should know about is tax preparation fees.

[![r/Superstonk - Tax Cheat Sheet Part II - Deductions](https://preview.redd.it/j7zzydysu4171.jpg?width=1079&format=pjpg&auto=webp&s=5412021888647fdfebe3e1edee4286b504c257ae)](https://preview.redd.it/j7zzydysu4171.jpg?width=1079&format=pjpg&auto=webp&s=5412021888647fdfebe3e1edee4286b504c257ae)

Lot of words. Here's a meme.

Gifts to Charity - Read Me!

I saved this for last because I think it is the most relevant to you. Also, I know we all want to give back. Please keep in mind that gifts to charities are not the same as a gift tax returns. I will cover these later this week too.

[The IRS has its own database](https://apps.irs.gov/app/eos/) where you can search to see if an organization is qualified. I would assume most charities that you think of are qualified.

Examples of charities: Religious Institutions, Red Cross, Salvation Army, Nonprofit hospitals and medical research organizations, nonprofit colleges

What is NOT a qualified charity: GoFundMe, Kickstarter, etc. -- these are not deductible. The charity has to be official.

[![r/Superstonk - Tax Cheat Sheet Part II - Deductions](https://preview.redd.it/9pglob27t4171.png?width=588&format=png&auto=webp&s=df6e98b094a746bcbfdca20f375650ae9b04d813)](https://preview.redd.it/9pglob27t4171.png?width=588&format=png&auto=webp&s=df6e98b094a746bcbfdca20f375650ae9b04d813)

Straight from the IRS

What Can You Donate?

Cash or Check: New for 2020, you can deduct up to 100% of your AGI in cash donations (this used to be 60%). *HOLY MOLY!*

ELIA: Ape sold 1 share for $20,000,000. Ape's AGI is $20,000,000. Ape donates $15,000,000 in cash to charities. Ape's income is now $5,000,000.

Noncash Contributions

You can donate things that aren't cash. These can include clothes, real estate, cars.....and stock. *Do I have your attention now?*

Time to bring back the buckets. The dollar amounts below represent the total amount of donations.

Bucket A: Noncash Contributions Less than $250

Deductible if qualified charity and receipt is provided.

Bucket B: Noncash Contributions Greater than $250, Less than $500

Bucket A + you will need written acknowledgement from the charity confirming your donation amount

Bucket C: Noncash Contributions Less than $500, Less than $5,000

This will trigger Form 8283. Your accountant will need more info like Fair Market Value of the property on date of contribution. For donating securities, there will be a few more simple questions to answer. Oh, also everything in Bucket B.

Bucket D: Noncash Contributions Greater than $5,000

In addition to everything in bucket C, you will also need written acknowledgement from a Qualified Appraiser (defined at the end). The appraiser will assess a FMV of your donation and sign off on it. I have seen this once, where a client (owned ~200 rental properties), donated one to charity. What a nice client. Also what a nice tax deduction.

Bucket E (I didn't know this existed): Noncash Contributions Greater than $500,000

Everything in Bucket D + the qualified appraiser will publish a "Qualified Appraisal Report" which will be included with your tax return. Note that this report is not required for securities. Not a lot of IRS detail on this, but not surprising.

ELIA: Cash and noncash gifts are treated differently

AGI Limitations

We established that you can deduct up to 100% of you AGI with cash donations. Nice.

What about Non-Cash gifts?

The ruling is a little confusing, but I'm interpreting that it's limited to 50% of your AGI. It depends on the type of organization you are donating to. It looks like almost everything falls under the 50% limitation. The rest fall under 30% of your AGI.

EILA: Ape owns 2 shares of GME. Ape sold 1 share for $20,000,000. Ape's AGI is $20,000,000. Ape donates 1 share to a charity. An appraiser comes in and says "yes this is worth $20,000,000".

50% * $20,000,000 = $10,000,000. Ape can take $10,000,000 deduction. Ape's income is now $10,000,000.

What if I Donate More Than the AGI Limit?

The amount over the AGI maximum will be carried forward to next year's return where you can deduct it then. *Contributions can be carried forward for 15 years* before they expire.

ELIA continued:

$10,000,000 of Ape's donation from earlier will be deducted this year (50% * $20M AGI Max) . The other $10,000,000 Ape can deduct on next year's return! If ape donates too much next year, extra bananas carried to the year after that! Ape has 15 years to use all extra bananas before bananas expire.

FYI -- there are a lot of really-specific limitations not included here. They probably won't apply to almost everyone. But yeah, there are other AGI limitations ([Pub 526](https://www.irs.gov/pub/irs-pdf/p526.pdf) for those curious).

Qualified Appraiser

[Here's a link](https://www.artifactualhistory.com/what-is-a-qualified-appraiser-as-defined-by-the-irs) with the IRS definition for appraisers. I'm not sure about how this process works, but I'm sure it's common with High Net Worth Clients.

ELIA: You need a professional to verify your BIG BALL donation

That was a lot. My head hurts too. Hence why I'm making a part 2.5 for everything else. Here's one more meme.

[![r/Superstonk - Tax Cheat Sheet Part II - Deductions](https://preview.redd.it/l2u99dwoz4171.jpg?width=828&format=pjpg&auto=webp&s=213441ab89bf0cfcb1bc73417c9197a22e65fc99)](https://preview.redd.it/l2u99dwoz4171.jpg?width=828&format=pjpg&auto=webp&s=213441ab89bf0cfcb1bc73417c9197a22e65fc99)

My Worst Nightmare

Tl;dr: This is why you're going to pay a CPA firm $20,000+ to do this for you and it is worth every penny (Welcome to being High-Net Worth). I will make a post to explain why in the future. :)

Closing notes:

-   We're going to get to Gifts/Estates/Trusts! A lot of this information builds off each other, so I think getting through some basic loss/deduction rules will be helpful before we branch off into other tax entitles

-   I've gotten a lot of interesting *and specific* questions on State Taxes. For right now, the answer is I don't know! The rules are all different and can change at any time! This is why most accounting firms have an entire team dedicated to JUST State & Local Taxes.

-   I will put together a step-by-step easy guide on how to find out all of your state questions online (it's not as advanced as you think. This is what we do in public accounting)

-   Foreign apes, I see your comments! I just ask you to be a little patient! Let me get through the rest of the fundamentals and I will get a post for you guys! I honestly know nothing about this area (just yet)!

-   If you find any interesting articles/videos/topics about highly specific things, feel free to comment/DM them and I will try my best to explain.

-   I've been slammed with COVID-related tax season for the past 5 months, which is why it took so long for me to post these! I hope to use this downtime, before everything returns to normal, to ease some fear about taxes

-   I'm able to get fundamentals out quickly because they're mostly review from college courses and CPA exams. Once we get into more complex things, it will probably take me longer to absorb and write up!

-   Don't get too comfy. If MOASS this summer, I would expect most state to add or increase their tax rates as a result. No idea if/when they would be passed.

Thank you so much for reading :)

Topics I will cover in the future:

-   Deductions and Losses pt. II - IRAs

-   Gift Tax, Trusts and Estates

-   Estimated Tax Payments/State taxes

-   Finding a CPA firm / what to expect / how not to piss off your accountant

-   Non for Profits / private foundations / etc.

-   Foreign Apes

Sources:

<https://www.investopedia.com/terms/m/magi.asp>

<https://www.investopedia.com/terms/g/grossincome.asp>

<https://www.investopedia.com/articles/tax/11/above-the-line-deductions.asp>

<https://www.irs.gov/pub/irs-prior/i1040sca--2020.pdf>

<https://www.irs.gov/taxtopics/tc503>

<https://www.irs.gov/pub/irs-pdf/p526.pdf>

<https://www.investopedia.com/articles/personal-finance/041315/tips-charitable-contributions-limits-and-taxes.asp>

Edit 1: [u/ReverseTickleMonster](https://www.reddit.com/u/ReverseTickleMonster/) brought up a good question on [bunching charitable donations](https://www.donorstrust.org/donor-advised-funds/bunching-strategy-charitable-giving/), which is something I haven't heard of!

This is a cool method to maximize your deductions for your next tax return if you usually don't have a lot of itemized deductions.

My only concern with this is that with MOASS, we will have drastically higher incomes than most people. A few thousand $$ won't make much difference it you have *millions* of income being taxed at the highest tax bracket. I highly encourage taking significant itemized deductions to help offset the millions of income we could be looking at.

Keep those questions coming!
