Garage sale profits are taxable income

UPDATE 11/11/2009: I answered the question "is garage sale income taxable?" a couple years ago. This answer was based on my own experience at the time. At the time I wrote the response, I based it on my own experiences and on the specific question asked by the "asker." The IRS has since offered a clearer answer, and indicates that not all garage sale income is necessarily taxable. It depends upon the circumstances. Please read the IRS page for more information.

We didn't receive a new tax question for the last few days, but now they're rolling in again. So we're back, and ready to answer this one for Michelle in Wisconsin.

Q: I held a garage sale this summer to clear out some of the extra "junk" we'd been collecting around the house for years. I think we made about $650 in three days. Do we have to pay income taxes on this?

A: Ah...garage sales are one of those wonderful traditions we love. I look forward to them every spring and summer and always make sure I stop to browse at a few. You never know what you might find!

But just like any other business, any income you make at a garage sale is taxable. Plus, you don't have the benefit of being able to write off any sort of business expenses or losses (unless perhaps you paid $10 for a classified ad in your local newspaper). So, make sure you report that income, Michelle.

But what if I told you there's an even better option to having a garage sale? Have you considered just packing all of that extra "stuff" into your car and driving it down to your local Goodwill, Salvation Army store or charity?

Many charities accept all kinds of donations - clothing, furniture, electronics, household items - and will give you an itemized receipt, which you can then use to determine the value of your donation and write it off your taxes.

It's tempting to hold that garage sale and put a few hundred dollars of cash in your pocket. But you may find that donating the items actually saves you more money on your taxes than you'd make by selling them and paying income taxes on the profits. Plus you'll have the added satisfaction of helping out the less fortunate among us and it won't take up your entire weekend, which gives you time to go out and do some garage sale shopping of your own!

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Filing tax returns for minors

Today's question comes from Roger V. in Tampa, Florida. He wants to know more about the process of filing a tax return and claiming deductions for a minor.

Q: My son is 17 years old and had a part-time job most of this year. He'll probably make close to $10,000 by the end of the year. My wife and I will be claiming him as a dependent on our taxes. Does he need to still file a return? Can he claim any deductions?

A: First, congratulations to your son. A job is a great way to learn more about personal responsibility and finances, balancing work life and school life and of course, making a little extra money.

Yes, he'll still need to file state and federal tax returns for his income and any sort of investment gains or savings account interest even if you claim him as a dependent. What's important to note though is that he cannot claim a deduction for himself if you are claiming him as a dependent.

My friend's family had this issue come up while their 19 year old daughter was living at home and working. The parents claimed her as a dependent, but she also took a personal deduction on her own taxes. The IRS red-flagged this, as it is essential an illegal attempt to take credit for the same individual on two different tax returns. They had to sort things out with the IRS folks, paying the previously unpaid taxes plus a small penalty.

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Researching property tax liens

Today's question comes all the way from England. Cassandra J., of the United Kingdom, is about to buy a home and is concerned about being stuck with someone else's back taxes.

Q: I am considering the purchase of a mobile home. How would I find information on tax liens (unpaid back taxes) and unpaid utilities on the property?

A: Generally we consider questions related to U.S. federal, state and local tax issues. But this topic is important for everyone to consider, regardless of your location.

A home is often the single largest purchase/expenditure the average person will make during their lifetime. It can be a fantastic investment...paying toward something you will own and will most likely continue to increase in value rather than paying rent each month, while also garnering income tax deduction benefits too.

But one also must be careful and thoughtful when purchasing a home. Due dilligence is critical.

When it comes to unpaid property taxes in the United States, those may become the responsibility of the new owner if a home is sold. Make sure you ask the seller whether there are unpaid taxes on the property, and then do a check of your own.
In most U.S. counties, the County Auditor is the place to check. These unpaid taxes are a matter of public record and documentation must be presented to you upon request. Most county auditors now how their own websites where you can learn more about a specific parcel's tax assessed value, semi-annual property tax bill and any unpaid/delinquent tax bills.

In the U.K., rules on unpaid taxes may vary from those in the U.S.

The Council Tax is the main form of local taxation in England, Scotland and Wales. It is paid by some residents to the local authority.

It was introduced in 1993 thanks to the Local Government Finance Act 1992 as a successor to the Community Charge or Poll Tax. The base for the tax is residential property.

Again, it is advisable to contact your county government regarding unpaid Council Tax bills. They will be able to share more information about a specfic property and may be able to answer your questions about the water bill as well.

The U.K. government also has council tax resources for your consideration.

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Taxable gains on investment property sale

Hamid M. of San Francisco, Ca. wants to learn more about paying taxes on the sale of an investment property.

Q: I purchased a house several years ago which I sold this year at a profit of about 50%. I live in California and the property is in Arizona. Do I owe taxes on the gain to the IRS, Arizona AND California too?

A: You do owe federal taxes on the gain you realized from the sale.

But often, states have rules and agreements that avoid double-taxation for such sales.

You should contact the tax offices for California and Arizona to learn more about their individual rules and regulations.

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Statutes of limitations on filing returns, claiming refunds

Mike B. of Greenbrier, TN, writes to us with a question regarding IRS statutes of limitations.

Q: I did not file a tax return in 1996. Since this was so long ago, do I need to worry about it if I am audited by the IRS? If I filed it now, could I claim a refund if I overpaid on my taxes?

A: There is usually a three year statute of limitations for the IRS to audit a tax return and a 10-year statute of limitations for collecting taxes.

According to Tax Code section 6501(e), the statute of limitations is six years if the taxpayer omits additional gross income in excess of 25% of the amount of gross income stated in the tax return they filed.

You may file a tax refund claim for overpayment of any tax within three years from the time the tax return was filed, or two years from the time the tax was paid, whichever period is the last. If no tax return was filed with the IRS, the claim may be made within two years from the date that the tax was paid.

Under section 6511(d)(1) of the Tax Code a taxpayer may file a claim within seven years if the tax refund pertains to a bad debt or in connection with a loss from a worthless security.

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Deducting credit card interest is a no-no

Today's question comes from Del B. of Newport, Tennessee, who wants to know a little more about what kinds of interest payments can be considered deductible.

Q: I know that home mortgage interest is usually deductible from my taxes, but what about credit card interest payments, especially if my purchases were for home improvements? Is the interest on these purchases deductible?

A: The short answer is: "No, credit card interest is not deductible."

According to the IRS,

You cannot deduct personal interest. Personal interest includes interest paid on a loan to purchase a car for personal use, credit card and installment interest incurred for personal expenses. Items you cannot deduct as interest include points (if you are a seller), service charges, credit investigation fees, and interest relating to tax–exempt income, such as interest to purchase or carry tax–exempt securities.

Luckily, there ARE other types of interest that are dedeductible.

Itemized deductions on IRS Form 1040, Schedule A, can include investment interest and home mortgage interest, including points in certain circumstances. You also can deduct student loan interest.

Home mortgage interest is condsidered interest you pay on a loan secured by your main home or a second home. The loan may be a mortgage to buy your home, a second mortgage, a home equity loan, or a line of credit. But don't confuse a line of credit with a credit card. They are not the same thing. That's why it often makes more sense to take out a line of credit on your home's equity or a home equity loan to fund repairs and improvements, rather than charging it to a credit card. Do the math, comparing interest rates, fees, etc. to see what makes the most sense for you.

According to the IRS, your main home is where you live most of the time. It could be a house, coop apartment, condominium, mobile home, house trailer or even a houseboat that has sleeping, cooking and toilet facilities.

A second home can include any other residence you own, and treat as a second home.

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Can you slim down your tax bill with exercise?

Jen S. of Minocqua, Wisconsin has a question related to fitness clubs and taxes.

Q: Can you deduct helath and fitness club membership costs or vitamins and dietary supplements from your taxes as medical expenses?

A: Exercising regularly and eating right are the most effective ways to maintain your weight and live a healthy lifestyle. It will definitely slim your waistline. But unfortunately it won't do the same for your taxes.

Fitness centers and supplements are not medical deductions for most individuals. They could potentially be considered a deduction if you made your living as a personal trainer. In that case, at least the health club membership could be considered a business expense, as long as it was used in conducting business of some sort (working with clients, etc.).

The food supplements though would not be considered deductible. But if your doctor prescribes drugs specifically for weight loss, those WOULD be deductible medical costs. Or if your doctor puts you on a prescribed weight loss program that includes something along the lines of Weight Watchers meetings or other nutritional counseling, those costs could be written off too. But once again, your food costs, even for low-fat or "diet foods" like Jenny Craig meals, are not tax deductible.

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Itemizing charitable contributions

Mel S. of Port St. Lucie, Florida, wanted to learn more about documenting charitable contributions used as deductions on his federal taxes...

Q: If I donate my car to a qualified charity, do I need any forms or receipts to claim this on my taxes?

A: If your deduction claim is more than $500, you need to use IRS Form 8283, for Noncash Charitable Contributions. If you claim a total deduction of $5,000 or less for all contributed property, you only have to complete Section A of that form.

But if your deduction is for more than $5,000 for a single item or group of similar ones, you'll also need to complete Section B. This typically requires a professional appraisal of your donation.

According to the IRS, you need to obtain and keep evidence (a receipt) of your car donation and be able to prove the fair market value of the car. If you are claiming a deduction of $250 or more for the car donation, you'll also need a written record from the charity that includes a description of the car and a statement of whether the charity provided any goods or services in return for the car, their value, etc.

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What is the Earned Income Tax Credit, and how do I qualify for it?

Today's question comes from Tamara T. of Athens, Ga. She asks about a frequently misunderstood and surprisingly overlooked portion of the federal tax code - the Earned Income Tax Credit. We'll try to make it understandable.

Q: What is the Earned Income Tax Credit, and how do I qualify for it?

A: In the United States, the EITC is atax credit that reduces or even eliminates the taxes that some low-income working
people pay.

Put into law in 1975, the EITC was expanded in 1986, 1990, 1993, and 2001.
In essence, it functions as a wage subsidy for low-income workers.

According to the IRS:

To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return.

The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.

The IRS has certain rules and guidelines to determine if you qualify for a full or partial tax credit. If you'd like to see if you qualify, gather up your W-2's and other tax records and visit the IRS website to fill out a questionaire that will determine your eligibility.

The Center on Budget and Policy Priorities also has an excellent Tax Credit Outreach Kit that you may want to investigate to learn more.

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What is RITA?

Today's question comes Jennifer D., of Toledo, Ohio, and is a question of import specifically to Ohioans...

Q: What is RITA, and do I have to pay it?

A: There is no R.I.T.A. tax, per say. RITA is an acronym for "Regional Income Tax Agency", an organization that provides services to collect income tax for 135 municipalities/local cities in the State of Ohio.

The group was formed in 1971 and is governed by a board of nine trustees elected by, and responsible to, the Regional Council of Governments. Trustees are elected for staggered three year terms.

According to the RITA website,

Currently, the R.I.T.A. Board of Trustees consists of elected officials and government administrators from R.I.T.A. municipalities. All R.I.T.A. Board members serve on a voluntary basis and meet at least once a month to establish, review, and maintain general operation policies for R.I.T.A. The members of the Board of Trustees appoint the Executive Director, who is responsible for the staffing and operations of the Agency.

Any resident or partial-year resident of a R.I.T.A. municipality, 18 years of age or older who has earned income is obligated to pay their local taxes via this entity.

The Local Wages, Tips, etc. box on your W-2 statement (usually box 18) is used in determining taxable income for R.I.T.A. This is also the highest income figure reported on the W-2.

All R.I.T.A. member municipalities require individual taxpayers to pay estimated tax payments during the tax year on a quarterly basis for any anticipated tax due.

Most employers only withhold "workplace city tax" (as required by local tax ordinance) and do not withhold resident city tax.

Local tax ordinance requires estimated tax payments to be made.

Please visit the RITA website for blank tax forms and more information.

So yes, Jennifer, you do have to pay your local income tax. But no, you won't also have to make a check out to Amy, Susan, or Tanya for that matter. RITA is the only woman you'll be paying taxes to this year.

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Send us your questions

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