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Taxpayer asks:

I paid short term and long term capital gains on my Bitcoin when I moved it from Coinbase into my hardwallet. Do you see any reason I should have to pay more taxes again when I spend some of these same Bitcoins from my hardwallet? Thanks.

Taxgirl says:

This is a great question. Guidance on the tax treatment of cryptocurrency has been limited (and late in coming), so there’s still a lot of confusion.

Some background might be helpful. In 2014, the Internal Revenue Service (IRS) issued guidance to taxpayers (downloads as a PDF), making it clear that virtual currency will be treated as a capital asset, provided they are convertible into cash. In simple terms, this means that capital gains rules apply to any gains or losses. 

That means, generally:

  • For those taxpayers buying and selling cryptocurrency as an investment, calculating gains and losses are figured the same as buying and selling stock. That’s true, as well, when it comes to basis, holding period and a triggering (taxable) event.
  • For those treating cryptocurrency like cash – spending it directly for goods or services, or using it to buy other cryptocurrencies – the individual transactions may also result in a gain or a loss.

In your case, the trick is to figure the triggering (taxable) event. A taxable event is typically a sale or disposition of an asset. When it comes to cryptocurrency, a taxable event typically occurs whenever the crypto is traded for cash or other crypto or whenever the crypto is used to purchase goods or services.

It’s also true that cashing cryptocurrency out of an exchange or similar platform may be treated as a sale – even if you’re forced to withdraw it. It sounds like that’s what you did. You moved Bitcoin from one platform to another and paid the resulting tax on the gain. 

But you’re not done yet. When you spend your Bitcoin, you may be subject to tax again. That’s because you’ve experienced another triggering (taxable) event. The good news is that your basis will be adjusted accordingly.

Here’s an example.

Let’s say that you bought Bitcoin for $100, and when you moved it, it was worth $300. The gain was $200, and you paid tax on the gain.

Let’s assume that your Bitcoin are worth $350 when you’re ready to spend it. You will pay capital gains tax again – but using a new basis based on the value of the move from your last transaction.

So, in the first instance, it’s $300 (move price) – $100 (original cost) = $200 of gain. In the second instance, it’s $350 (value at the time you spent it) – $300 (new basis) = $50 of gain. All totaled, you have $250 in gain spread out over time. It’s the same result as though you held onto it for the entire time: $350 (value at the time you spent it) – $100 (original cost) = $250.

But what if it had gone south? Let’s say it was only worth $150 when you spent it. Then:

$150 (value at the time you spent it) – $300 (new basis) = -150 (you have loss).

You can claim up to $3,000 (or $1,500 if you are married filing separately) of capital losses and the amount of your loss offsets your taxable income for the tax year. If your losses exceed those limits, you can carry the loss forward to later years subject to certain limitations and restrictions.

Capital gains tax rates are generally favorable.

Capital gains rates for long term gains (those held more than a year) range from 0% to 20% while short-term capital gains are taxed as ordinary income.

You’ll report all of your realized gains and losses on Schedule D. You don’t file a Schedule D if you don’t have any realized gains or losses: even if the value changes, if there’s no sale or disposition, there’s nothing to report.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

So I was trying to figure out how screwed we (my wife and I ) are because of the new 2018 “tax cuts” and it looks like we lost about 16k worth of deductions. we paid approx. 22k in state, local and property tax (Paul Ryan would call this the SALT tax) but the Treasury now limits this deduction to 10k. So we lost 12k in deductions there. Also because of the new tax law our charitable tax deductions are now worthless to us so a loss of about 4k there for a total loss of 16k in deductions, or in other words I now owe an additional 4k in taxes. SOME TAX CUT! So what is part of the solution? I am now going to stop making charitable contributions and just put the money in a savings account. After about 10 years I will have about 40k in this saving account and if I donate it then I will be able to deduct nearly all of it because I will be far in excess of the standard deduction and I will qualify to deduct it again! I only point this out here because I have not seen a single tax account recommend this but for many people this makes sense.

Taxgirl says:

This is a great strategy. I’ve been encouraging folks to do something similar: it’s called bundling gifts. The idea, as you noted, is to alter the timing of your charitable giving game plan to pack the biggest punch. The reason, of course, is that with the doubling of the standard deduction (you can see the 2018 tax rates and other tax changes here), there’s a reduced incentive to itemize. Since you must itemize to claim a charitable deduction, some taxpayers won’t benefit by giving to charity in one year.

So, for example, instead of donating $1,000 annually for each of five years, consider giving $5,000 all at once. It’s the same gift as before, but if you coordinate it with your other potential deductions, you can take advantage of the deduction in a year you itemize.

One thing to keep in mind: as the law currently stands, the standard deduction/Schedule A scheme will remain in place through 2025. I tell taxpayers to plan using today’s laws because what one administration puts in place, another can take away – speculation is hard at the best of times. We aren’t sure what’s going to happen in 2026, but we have some inkling about what should happen for the next seven years. Keep those dates in mind when planning.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

I am married and due to my husband’s tax debt, we file as married filing separately.  I bought a house recently in my name only that we live in together, and he pays 1/2 of all house expenses.  Is this considered income to me?  The state we live in is Illinois.

Taxgirl says:

If you file as married filing separately, that means that you are reporting only your income and claiming only your deductions; your spouse’s income and expenses are reported separately.

Splitting household expenses happens all of the time and for all kinds of reasons (we do it in my family, too). Typically, since household expenses are personal in nature and are not deductible, there’s no corresponding income. So, from a federal income tax perspective, your spouse’s payments to you to help cover household expenses are tax neutral – in other words, no harm, no foul.

One quick caveat: You didn’t specifically reference a mortgage but if you do have a mortgage, the ownership and payment rules still apply for purposes of any home mortgage interest deduction. Also, remember that when you file separate returns, you and your spouse must both claim the standard deduction or both of you must itemize your deductions (you can’t itemize while your spouse claims a standard deduction).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

Does H&R Block allow you to use a cosigner for Emerald Advance?

Taxgirl says:

Emerald Advance is a prepaid card for your tax refund.

I don’t work with this kind of product, so I don’t know the details. To get your answer, I went right to the source. According to an H&R Block spokesperson, applications for Emerald Advance are for individuals, and there is no co-signer or co-applicant. If married, both spouses can apply. Here are the full terms and conditions (downloads as a PDF).

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

Hi! My husband and I had a whirlwind beginning to our relationship.  Long story short, we got married in secret and still haven’t told our families. I share an accountant with my entire family and my mother is involved with my taxes because of different financial situations we have in our family.  I don’t trust my accountant to not share this information with my mother, so can we both file as single without getting in trouble or anyone finding out?

My husband doesn’t have the same permanent address as me and he’s filling in a different state.

Thank you!

Taxgirl says:

It doesn’t matter what you put on your Christmas cards: when it comes to taxes, married is married. For federal income tax purposes, marital status is determined by state law as of the last day of the calendar year. If you are married on December 31, 2018, you are considered married for the 2018 tax year.

There are five filing statuses to choose from:

  • Single;
  • Married Filing Jointly (MFJ);
  • Married Filing Separately (MFS);
  • Head of Household; and
  • Qualifying Widow(er) With Dependent Child.

(You can find out more about filing status here.)

If you’re not married because you were never legally married or you were legally separated or divorced according to the laws of your state, you can file as single. You can’t file as single just because you feel single or want to file as single.

If you and your husband both file as single, you may be taking advantage of tax breaks that you’re not entitled to claim. For example, the student loan interest deduction is per tax return, not per taxpayer. So while a married couple would be limited to the $2,500 cap, two singles would be limited to a $5,000 cap. Choosing the wrong filing status can also skew phaseouts and limitations. The result is that your entire return could be flawed. The bigger problem is, of course, that by choosing the wrong filing status, you’re lying on the return.

If you’re found out, you’ll have to repay the tax that you should have paid if you had filed properly. You’ll also likely have to pony up penalty and interest.

Additionally, under Title 26 USC § 7206(1), a taxpayer who “[w]illfully makes and subscribes any return, statement, or other document, which contains or is verified by a written declaration that is made under the penalties of perjury, and which he does not believe to be true and correct as to every material matter” is committing a crime.

Keep in mind that you’ll be asked your filing status for tax purposes more than once. In addition to your federal form 1040, you may have to fill out state and local tax forms. And, of course, many informational forms and schedules require you to provide your filing status. For example, remember form W-4? It helps your employer determine how much federal tax to withhold from your paycheck. To do that, you have to report your filing status, and as with the federal form 1040, you sign under penalty of perjury.

There are non-tax reasons why this isn’t a good idea, too. If you want to apply for a mortgage or other loan which requires copies of your tax returns, you’re going to have to keep perpetuating the lie. Ditto for health insurance and other work-related benefits like retirement accounts, as well as legal contracts like deeds and mortgages which may require you to offer proof of marital status. How you answer those questions could have both legal and tax consequences.

With so many moving parts, keeping up with the lie is going to catch up with you. As Mark Twain once said, “If you tell the truth, you don’t have to remember anything.”

The bottom line is that this definitely isn’t a good strategy on the tax side. Only you can figure out whether it’s a good strategy on the family/relationship side, but it might be worth considering whether you want to start your new life with a lie. Best of luck.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

An enrolled agent has had my tax papers for over a year and a half. She does not return my calls. California is now coming after me for 2015 and 2016 taxes. I would like to pay these back taxes but don’t know what to do since she has all of my paperwork. I left a message saying that the California franchise tax board has taken money from my account and that this needs to be taken care of and she still will not return my call. They have returned most of my money for the time being but said I only until the beginning of November to file. What can I do?

Taxgirl says:

You are entitled to a copy of your return, and to the return of your documents.

I would make one more effort to get your documents back by writing a letter. Send it by certified mail, so that you have proof of delivery. Give your preparer the opportunity to make it right in the event that there’s some kind of misunderstanding.

If you still don’t get results, you can report the preparer to the Internal Revenue Service (IRS). To make a report, fill out federal form 14157, Complaint: Tax Return Preparer (downloads as a PDF).

The form starts out at Section A by asking you some questions about your tax preparer. In your case, you’ll want to select Enrolled Agent (EA). As noted in the instructions, an Enrolled Agent status is granted solely by the IRS upon the individual’s demonstration of special competence in tax matters, by written examination, and passing suitability requirements.

Complete as much of the rest of Section A as you can, including contact information. You should be able to find the Preparer Tax Identification Number on a copy of your tax return.

You’ll explain the bad stuff at Section B. Based on what you’ve said so far, you’ll want to tick the “Preparer Misconduct” box.

On the next page, you’ll spell out as many details as you can provide. I suggest outlining your case in chronological order: be as specific as you can with respect to dates that you contacted the preparer. Use more paper if you need more space.

Fill out the rest of the form with your contact information and sign where indicated.

You’ll want to send the form together with all supporting documentation to the IRS by fax or mail:

  • If by fax, 855-889-7957
  • If by mail, Attn: Return Preparer Office, 401, W. Peachtree Street NW, Mail Stop 421-D, Atlanta, GA 30308

Depending on the tax preparer’s credentials, you may also want to report him or her to their professional licensing and/or disciplinary boards. Because EAs are federally-licensed, there is no mechanism (or need) to report them to a state accountancy board or state bar association. The form 14157 is sufficient.

One more quick note: I would let the tax authorities know that you’ve still been unable to get your documents back and that you have filed a complaint. They might grant you more time or reduce any related penalties.

I’d also consider getting a new preparer to help you file the returns. I know that you don’t have your original documents, but you may be able to retrieve documents you need by checking with your employer and financial institutions. You can also try retrieving them from the IRS via the online transcript service.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl:

Assuming the total itemized deductions available to an individual in 2018 are exactly the same as the standard deduction, what are the reasons to take one approach over the other?

Taxgirl says:

For most taxpayers, you have the option of adding up your itemized deductions and using that amount or using the standard deduction. The standard deduction amount is a flat amount based on your filing status. Thanks to a tax reform-induced bump in the standard deduction, more taxpayers will be opting out of itemizing deductions in 2018.

But even before tax reform, most taxpayers claimed the standard deduction. Why? It’s easy. There’s no extra math, and you don’t need to file a Schedule A.

If the total of your itemized deductions is higher than the standard deduction, then you’d want to itemize, assuming you qualify to do so. But if they were exactly the same? In most cases, I’d choose the standard deduction.

Why? As noted above, it’s easier. It doesn’t require the preparation of a Schedule A which might keep your tax prep fees down. It may also reduce your adjustment or audit risk since there is less chance of mistake (no math!) and no requirement to keep supporting documentation.

There are a few instances, however, when you may not claim the standard deduction. For example, if your filing status is married filing separate (MFS), you have to coordinate your return with your spouse. If one spouse chooses to itemize, the other must also itemize; if one spouse claims the standard deduction, the other must also claim the standard deduction.

Some international taxpayers aren’t eligible to claim the standard deduction. A nonresident alien (more on that here) may not claim the standard deduction; some exceptions may apply including students and business apprentices from India (check out Publication 519, U.S. Tax Guide for Aliens for more information). Similarly, a dual-status alien may not claim the standard deduction.

In some cases, your standard deduction may be smaller or bigger than the flat amount. If you can be claimed as a dependent on another person’s tax return, your standard deduction will be limited. If you are over age 65 or blind, your standard deduction may be increased.

Again, most of the time, it’s a quick comparison to determine whether to claim the standard deduction or itemize your deductions. You’re just looking for the bigger number. But, assuming that the numbers are equal – and you’re not barred from claiming the standard deduction – I’d opt for the standard deduction. Of course, if you use a tax professional, he or she can help you determine which option works best for you.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl,

My husband was told that if he reclassified our home to a rental property and rents it to me then we could avoid the $10K tax cap as the real estate taxes, mortgage interest, and other related expenses would fall under Schedule E. We would then be able to take the standard deduction of $24K PLUS a potential rental loss each year. We would both still live in the home but move the home under an LLC and make a monthly rental payment to the LLC which will, in turn, make the mortgage payment. He said the property would be placed with a management company to make it an arm’s length transaction. Is this legal and does it help us to avoid the tax cap?

Taxgirl says:

The Tax Cuts and Jobs Act (TCJA) – the purpose of which was ostensibly to make taxes more simple – has inspired a great deal of creative tax planning. Some planning, like bundling charitable gifts, may result in significant tax savings, while other techniques are doomed to fail. Unfortunately, the scenario pitched to your husband falls into the latter category. It’s not going to work. Here’s why.

Under the TCJA, the amount that you may claim on Schedule A for all state and local sales, income, and property taxes together may not exceed $10,000 (you can see what Schedule A might look like in 2018 here).

Additionally, the TCJA caps new mortgages at $750,000 for purposes of the home mortgage interest deduction (for mortgages taken out before December 15, 2017, the limit remains $1,000,000). Those caps and limits, as you observed, do not apply to rental real estate (more on that here). That’s led to some supposition that re-characterizing residential real estate might allow you to claim on a Schedule E what you can’t deduct on a Schedule A.

The Internal Revenue Service (IRS) doesn’t love what it calls form-over-substance techniques and instead relies on substance-over-form principles. The substance-over-form principle can be boiled down to the adage, “If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” In other words, you typically can’t repackage one thing (like residential real estate) as another thing (like rental real estate) and pretend it’s not the first thing to avoid paying taxes. So, from the start, I think that there’s a problem with the transaction as proposed because you’re not suggesting an alternative use, just an alternative skin.

But let’s assume for a moment that the IRS did allow the transaction. What then? If your husband did treat your home as a rental property and rented it to you, you could escape the Schedule A caps and limits by reporting expenses on a Schedule E. But in turn, you’d have to report the corresponding rental income. To keep it an arm’s length transaction, you’d have to charge fair market value rent. So if you paid $2,000 in rent to cover $2,000 in costs, it would be a wash since the income would offset the expenses. There’s no loss nor any benefit since you’d simply break even.

But, for the sake of seeing the idea through, let’s say that the IRS did allow the transaction and that there was a loss because the fair market value rent simply wasn’t enough to meet expenses. If you consistently produce a loss, you’re bound to attract attention. The IRS has long considered profit motive as a critical factor to determine whether an enterprise is legitimate. In a real business, if you were consistently posting a significant loss, you’d either change gears or close down; you wouldn’t continue to plug along at the same speed, bleeding money. For your purpose, I assume you’d want to treat the real estate as a rental for at least the life of the TCJA provisions, or seven years. As a rule of thumb, when it comes to running a business, the IRS expects to see a profit at least three of five tax years. A consistent pattern of significant, unexplained losses will almost surely be disallowed on an audit.

(Note that other, more complicated rules may apply to the treatment of losses for self-rentals, but they’re a bit dense for our purposes. What you should know is that self-rentals tend to be subject to passive loss rules, and losses may not be deductible in the current year. The TCJA also adds a layer in the form of a new loss deduction rule. If you are engaged in a self-rental, even for legitimate purposes, you should check with your tax professional for more information.)

There are a few other issues to consider. By treating your home as rental real estate or transferring your home into a limited liability company (LLC), you may lose the benefit of the capital gains exclusion for your personal residence. The TCJA didn’t change those rules which allow you to exempt up to $250,000 of the gain from the sale of your home ($500,000 for married taxpayers). The capital gains exclusion is available to taxpayers who meet two tests:

  • You must have owned your home for at least 24 months during the last five years leading up to the date of sale; and
  • You must have lived in your home as your primary residence for at least 24 of the months you owned the home during the five years leading up to the date of sale.

If you don’t qualify for the exclusion, you must pay capital gains tax on any appreciation when you sell your home.

In addition, if you treat your home as a rental, you may lose other state and local residential tax breaks, like homestead and related deductions and rebates.

The LLC may further complicate matters. The LLC may be subject to additional taxes and fees since almost every state imposes some kind of initial filing and annual fees. In addition, you may be required to pay a real estate transfer tax or fee when you transfer the home into (or out of) an LLC or other entity; in some states, those fees can be substantial. Of course, in addition to state taxes, there may be rental registration fees and taxes imposed by your local government.

So even if you could figure out how to make the transaction work on paper, any federal income tax savings could easily be eaten up in state and local taxes and fees.

Finally, don’t forget the non-tax consequences of treating your home as a rental. If your home is subject to a mortgage, your lender may balk at a transfer or require you to take out a more expensive commercial mortgage (those typically require a higher down payment). You may have to switch out your homeowner’s insurance for a commercial or rental policy. You may be required to hardwire the property to meet local police and fire alarm related ordinances. More important, your local zoning and other laws may not even permit a rental in your neighborhood.

The bottom line: Nobody wants to pay more in taxes than they have to, but be careful. Make sure that you consider all of the possible consequences – taxes and otherwise – before making significant changes. As with the question of whether to incorporate (you can read more on that here), it’s essential that you do your homework. Figure all of the costs and consequences before transferring your home (or other assets) to save taxes. And remember: Every taxpayer is different. If you have questions, you should consult with your tax professional.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl,

Can you solve a disagreement? My girlfriend had a small tax refund last year. She just applied it to next year because she knows she is going to owe taxes. I said she should have taken out the refund and invested it instead. Who is right?

Taxgirl says:

You both are – depending on the circumstances.

When you are owed a tax refund, it typically makes good financial sense on paper to claim it as soon as possible. After all, why would you want to give the government the use of your money without earning interest? And it’s not unlikely that you could generate more money, either in interest or growth, by investing your refund. So in that regard, you’re right.

However, you shouldn’t do tax planning in a vacuum, and context is important. If you know that you’re going to owe taxes, and if you know that you should be making estimated payments, it’s not necessarily a bad idea to simply let the refund “ride” and be applied towards your next year’s tax liability. There’s even a spot for it on your tax return (at least for now).

This can be helpful if you are not good at planning or if you know that you aren’t timely when it comes to making estimated payments. If you owe taxes and you don’t make payments on time, you might be subject to a penalty which could “eat up” any potential growth or income that you could have saved by investing your refund.

Other factors to consider include the amount of money involved (rolling a small amount over tends to be a better move than a significant amount), your level of financial or investing savvy (this might not be the optimal time to start trading), and your ability to follow through (if you aren’t great at deadlines, making estimated payments can be challenging). Your resources also matter: If you have a financial planner and a tax professional to help you stay on top of things, that can make a difference. Self-discipline is essential, too: If you take the money out with the best of intentions, but end up frittering it away rather than investing it or putting it aside to be used to pay your liability, you aren’t doing yourself any favors.

The bottom line? Know yourself. The Internal Revenue Service (IRS) processes around 150 million individual tax returns each tax season, and each return is different. What works for one person might not necessarily work for another person – even if, as here, you think you know that person pretty well.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.

Taxpayer asks:

Dear Taxgirl,

Is the NRA a charity? I thought that charities couldn’t be involved in politics?

Taxgirl says:

This is a great question.
The National Rifle Association (NRA) is not a charity in the same way that, say, Red Cross is a charity. They are, however, both tax-exempt organizations. Here’s what you need to know.

Tax-exempt organizations are governed, generally, at section 501 of the Tax Code. The code section that most of us know best is 501(c)(3) which applies to organizations “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition… or for the prevention of cruelty to children or animals.”
Section 501(c)(3) organizations, those that we think of as charities, are tax-exempt for federal income tax purposes. It’s worth noting that payroll, sales, real estate, and other taxes may still apply. But the real benefit of section 501(c)(3) organizations is that donations made to them are deductible by the donor as charitable contributions for federal income tax purposes.

In exchange for the tax benefits, section 501(c)(3) organizations face restrictions on lobbying and are banned from politicking. In fact, as part of the application process, the organization must certify that it won’t, “as a substantial part of its activities, attempt to influence legislation” or “participate to any extent in a political campaign for or against any candidate for public office” (emphasis added).

Examples of well-known section 501(c)(3) organizations include Red Cross and United Way. You can also check out my 12 Days of Charitable Giving series for more examples.

The NRA is not a section 501(c)(3) organization. Rather, it’s organized as a section 501(c)(4) organization.

Those are described in the Tax Code as “[c]ivic leagues or organizations not organized for profit but operated exclusively for the promotion of social welfare, or local associations of employees, the membership of which is limited to the employees of a designated person or persons in a particular municipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes.”

Like section 501(c)(3) organizations, section 501(c)(4) organizations are tax-exempt for federal income tax purposes. And again, payroll, sales, real estate, and other taxes may still apply.

However, there is one significant difference: Section 501(c)(4) organizations may engage in lobbying so long as it pertains to the organization’s mission. The trade-off, as you might have guessed, is that donations made to 501(c)(4) organizations are typically not deductible by the donor as charitable contributions for federal income tax purposes (some extremely limited exceptions, like donations to volunteer fire companies, do exist).

The notion of tax-exempt entities has been around for more than 100 years. They first made an appearance in the Tariff Act of 1894 and were formally recognized as part of our modern income tax system in 1913. In 1959, in order to clarify confusion related to section 501(c)(4), Treasury issued regulations to include organizations which “engaged in promoting in some way the common good and general welfare of the people of the community” but would not include “direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office.” The language was broad enough – unlike the rules for public charities at section 501(c)(3) – that some participation in political campaigns was considered allowable. Exactly how much some might be was not defined.

You know what came next. In 2008, a group called Citizens United wanted to promote a film heavily critical of Hillary Clinton who was, at the time, seeking the Democratic presidential nomination. The Federal Election Commission (FEC) said no, claiming that it was a violation of the McCain–Feingold Act. Eventually, the case ended up at the Supreme Court, which ruled 5-4 in favor of Citizens United (downloads as a PDF).

Today, the IRS takes the position that “[p]romoting social welfare doesn’t include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, if you submit proof that your organization is organized primarily to promote social welfare, it can obtain exemption even if it participates legally in some political activity on behalf of or in opposition to candidates for public office.”

Examples of well-known section 501(c)(4) organizations include the American Civil Liberties Union (ACLU), the American Association of Retired Persons (AARP), and, as noted, the NRA.

Sometimes, an organization may have more than one mission and/or purpose. In that case, they often branch into different entities. So while the NRA is organized as a section 501(c)(4) organization which advocates for gun rights, a related organization, the NRA Foundation, is a 501(c)(3) charitable organization “designed to promote firearms and hunting safety, to enhance marksmanship skills of those participating in the shooting sports, and to educate the general public about firearms in their historic, technological and artistic context.” Donations to the Foundation are tax-deductible to the full extent allowed by law.

Some of this information – the charitable part, anyway – is available online. When evaluating a charity, you can quickly check the status of most organizations by using the EO Select Check tool on the Internal Revenue Service (IRS). However, it’s worth noting that Select Check will typically only return those organizations with section 501(c)(3) status. If you have questions about other tax-exempt organizations, including section 501(c)(4), you can call the organization – or if you know the state where the organization is located, you can check out the Master Tax Exempt file extracts.

Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.