Tax Considerations: Rentals, State Taxes & Charitable Contributions

Navigating the realm of tax-related inquiries can often leave individuals seeking clarity on various aspects of their financial obligations. This article delves into common questions regarding rental income, state and local taxes, bonds, and charitable contribution deductions. Joy Taylor, editor of The Tax Letter, offers valuable insights and answers to these queries. Whether you're a retiree or an employee of a Fortune 500 company planning for retirement, understanding these tax considerations is crucial for effective financial planning.

One of the frequently asked questions pertains to the deductibility of charitable contributions. Only those who itemize deductions on Schedule A can claim deductions for charitable contributions. However, a bipartisan group of legislators is working towards making this deduction available to all taxpayers. Their proposal suggests allowing non-itemizers to deduct charitable contributions equivalent to one-third of the standard deductions in 2023 and 2024. This modification could result in substantial write-offs, benefiting single and married filers.

Another common query concerns gifting savings bonds and their impact on income tax. Unfortunately, gifting EE or I bond before maturity does not eliminate the tax consequences. Generally, the interest earned on these bonds is deferred for federal income tax purposes. However, gifting them accelerates the reporting of interest, requiring the payment of U.S. tax on the previously deferred interest in the year of the gift, regardless of whether the bonds are reissued in the recipient's name.

Many individuals inquire about their eligibility for the 20% Qualified Business Income (QBI) deduction in relation to rental property income. The eligibility for this deduction depends on various factors. It is available to self-employed individuals and owners of pass-through entities, subject to income limitations. In some instances, rental income reported on Schedule E may qualify, but applying the QBI rules to rental real estate income can be complex. The IRS regulations stipulate that the rental activity must qualify as a trade or business based on the taxpayer's specific circumstances. Alternatively, a safe harbor provision exists for individuals who dedicate at least 250 hours per year to rental activities, including repairs, rent collection, lease negotiations, and tenant services.

Self-employed individuals frequently inquire about deducting state and local property taxes paid through their business. Unlike the limitations imposed on Schedule A itemized deductions, property and sales taxes are fully deductible for individuals engaged in a trade or business. Farmers can claim property and sales tax deductions on Schedule F. At the same time, self-employed individuals can do so on Schedule C. Landlords, on the other hand, can deduct property taxes paid on rental properties they own by utilizing Schedule E.

Understanding the implications of taxes is essential for effective financial planning, especially for those approaching or already in retirement. This article addresses common tax concerns related to rental income, state and local taxes, bonds, and charitable contribution deductions. By providing accurate and insightful responses to these questions, we aim to empower individuals to make informed decisions regarding their tax responsibilities. Whether you're preparing for retirement as an employee of a Fortune 500 company or currently a retiree, staying informed about tax-related issues can help you navigate the intricate world of taxation and optimize your financial well-being.

Sometimes, the realm of home taxes can feel like an intricate labyrinth filled with hidden treasures and perplexing riddles. Imagine yourself as an adventurous explorer equipped with a map that holds the answers to your most pressing tax inquiries. With every turn, you unravel deductions, exemptions, and advantages associated with homeownership. Like a skilled explorer, you stumble upon the secret "over 55 rule," leading you to a trove of property tax savings when relocating. Along the way, you decipher the enigmatic QBI deduction and learn how to unlock its potential for rental income. By immersing yourself in the wisdom of the Kiplinger Tax Letter, your roadmap to tax mastery, you navigate the complexities of home taxes and emerge as a savvy homeowner ready to conquer the tax landscape.

To further enhance your understanding of these tax considerations and receive personalized guidance tailored to your specific situation, we invite you to schedule a free consultation with our experienced tax professionals.

Lynch Retirement Investment Group 2016, 2017, 2018, and 2019

John M. Lynch, CIMA®, CPWA®

John M. Lynch, CIMA®, CPWA® Managing Director – LRIG, Financial Advisor – RJFS

Andrew Fentress, CFP® Financial Advisor

Adam Tobin, CFP®, CRPC Customer Relationship Manager

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