January 1, 2023

Are Political Contributions Tax Deductible?

Updated for tax year 2022.

Campaign contributions total hundreds of millions of dollars, and they continue to rise. With this level of fundraising, one question is sure to come to mind: Are political contributions tax deductible?

The short answer? No.

Most political contributions, whether local, regional, or national, are not tax-deductible and haven’t been for years. So, if you are one of the many people donating to political candidates’ campaign funds, don’t expect to deduct any of those contributions on your next tax return.

The same goes for a business return. In most cases, political contributions are not considered a viable business expense and therefore are nondeductible.

While writing checks to a political party may not help your tax bill, there are ways to financially support a cause you believe in and still take a tax benefit. You just have to find a charity that qualifies for tax-deductible contributions.

Tax-qualified charities aren’t allowed to lobby or give money to a candidate, political party, or political action committee (PAC). However, under the banner of “education,” they can help persuade people about pertinent issues, which could impact the final election outcome.

How do I know if donations to a charity are tax deductible?

Only contributions to 501(c)(3) organizations are tax-deductible. These nonprofits have been designated as charitable organizations by the IRS.

To help clarify any confusion, specific details regarding the type of IRS organization and whether donations are tax-deductible should be clearly stated by the charity.

If you’re still in doubt, the IRS has an online tool that can help. The Exempt Organizations Select Check search tool lets you search for organizations and find specific information regarding their status.

Not all organizations are listed, and some use “doing business as” names, meaning they operate their business under a name different from their legal, registered name. In this case, searching by their legal name may not appear in the database.

Your Facebook donations may also be deductible if the organization meets the above requirements.

What about other nonprofits that promote causes I believe in?

If you want to donate to most social welfare nonprofits, otherwise known as 501(c)(4) organizations in the tax world, you’ll have to ensure they meet certain requirements to get a tax break. This includes (1) social welfare organizations not organized for profit that operate solely for the promotion of social welfare and (2) local associations of employees in a specific municipality that devote their net earnings exclusively to charitable, educational, or recreational activities.

However, there are a couple of exceptions for homeowners’ associations and volunteer fire companies, which may be tax-exempt if they meet certain requirements.

The post Are Political Contributions Tax Deductible? appeared first on TaxAct Blog.

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How to Calculate the Self-Employment Tax

Updated for tax year 2022.

No matter what self-employment looks like for you, you’re responsible for ensuring the taxes on your net earnings are paid to the Internal Revenue Service (IRS). And the self-employment tax (SE tax) is part of that.

Officially known as the Self-Employment Contributions Act tax, the SE tax is the self-employed community’s version of the taxes paid by employers and their employees for Social Security and Medicare.

Whether you run a bakeshop on the weekends, author blog posts as a freelance writer, or design logos for local businesses, you should know how the SE tax impacts your money. Let’s go over how to calculate the tax on your self-employment income.

Self-employment tax breakdown

Self-employment tax is split between two parts: Social Security and Medicare. It equals 15.3% of your self-employment earnings.

Social Security

The Social Security tax rate is 12.4 percent of your self-employment earnings. For 2022, Social Security taxes must be paid on all earned income up to $147,000 (increasing to $160,200 for tax year 2023). All income earned above that threshold is not subject to Social Security tax.

Medicare

The Medicare tax rate is 2.9 percent of your self-employment earnings. Medicare has no earnings limit, so all earned income is taxed. For high-income earners, 3.8 percent Medicare tax is due on earnings over your particular income threshold based on your filing status—that’s an additional 0.9 percent.

Who is required to pay SE tax?

Here are some examples of who needs to pay SE tax:

•       Sole proprietors of a business or trade

•       Independent contractors and freelancers

•       Members of a partnership of a trade or business

Even if you are traditionally employed and earn self-employment income on the side, you’re still likely required to pay SE tax on your side hustle earnings.

Steps to calculate self-employment tax

Ready to calculate how much self-employment tax you could owe this year? Let’s dive in. For additional assistance, you can also check out our self-employment tax calculator.

Step 1: Calculate how much of your net income is taxable.

To do this, multiply your total self-employment net income by 92.3 percent (0.9235). This is the percentage of your income that the IRS says is taxable.

For example, if you earned $100,000 in self-employment income during the year, you would multiply that number by 0.9235 to determine that your taxable net income is $92,350.

Step 2: Calculate the amount you owe for self-employment taxes.

To do so, you multiply your total self-employed taxable income by 15.3 percent (0.153). Remember, the 15.3 percent is the combined percentage for Social Security and Medicare taxes.

Continuing the example above, you would take the first number you got when determining your net taxable income ($92,350) and multiply it by 0.153. In this instance, the total SE tax owed would be $14,129.55.

Step 3: Report half of your self-employment tax as an adjustment to income on your tax return (Form 1040).

Your total SE tax is reported on Form 1040 in the “Other Taxes” section. You can claim 50 percent of self-employment tax owed as a tax deduction. This reduces your adjusted gross income (AGI) and the amount of income tax you owe.

Following our previous example, you’d take the number you got in step two ($14,129.55) and multiply it by 50 percent (0.5). In this instance, your reported adjustment to income would be $7,064.78.

Main takeaways

Whether you run a bakeshop on the weekends, author blog posts as a freelance writer, or design logos for local businesses, it’s good to know how the SE tax impacts your money. And if you’re still unsure about SE taxes, our self-employed tax software is here to make things easier for you.

 

This article is for informational purposes only and not legal or financial advice.

The post How to Calculate the Self-Employment Tax appeared first on TaxAct Blog.

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