Home Office Deduction

If you use part of your home for your business, you may qualify to deduct expenses for the business use of your home. Here are six facts from the IRS to help you determine if you qualify for the home office deduction.

1. Generally, in order to claim a deduction for a home office, you must use a part of your home exclusively and regularly for business purposes. In addition, the part of your home that you use for business purposes must also be:

·         your principal place of business, or

·         a place where you meet with patients, clients or customers in the normal course of your business, or

·         a separate structure not attached to your home. Examples might include a studio, workshop, garage or barn. In this case, the structure does not have to be your principal place of business or a place where you meet patients, clients or customers.

2. You do not have to meet the exclusive use test if you use part of your home to store inventory or product samples. The exclusive use test also does not apply if you use part of your home as a daycare facility.

3. The home office deduction may include part of certain costs that you paid for having a home. For example, a part of the rent or allowable mortgage interest, real estate taxes and utilities could qualify. The amount you can deduct usually depends on the percentage of the home used for business.

4. The deduction for some expenses is limited if your gross income from the business use of your home is less than your total business expenses.

5. If you are self-employed, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. Report your deduction on Schedule C, Profit or Loss From Business.

6. If you are an employee, you must meet additional rules to claim the deduction. For example, in addition to the above tests, your business use must also be for your employer’s convenience.



from IRS Tax Tip 2013-36:  

Top Six Tax Tips for the Self-Employed

When you are self-employed, it typically means you work for yourself, as an independent contractor, or own your own business. Here are six key points the IRS would like you to know about self-employment and self-employment taxes:

1. Self-employment income can include pay that you receive for part-time work you do out of your home. This could include income you earn in addition to your regular job.

2. Self-employed individuals file a Schedule C, Profit or Loss from Business, or Schedule C-EZ, Net Profit from Business, with their Form 1040.

3. If you are self-employed, you generally have to pay self-employment tax as well as income tax. Self-employment tax includes Social Security and Medicare taxes. You figure this tax using Schedule SE, Self-Employment Tax.

4. If you are self-employed you may have to make estimated tax payments. People typically make estimated tax payments to pay taxes on income that is not subject to withholding. If you do not make estimated tax payments, you may have to pay a penalty when you file your income tax return. The underpayment of estimated tax penalty applies if you do not pay enough taxes during the year.

5. When you file your tax return, you can deduct some business expenses for the costs you paid to run your trade or business. You can deduct most business expenses in full, but some costs must be ’capitalized.’ This means you can deduct a portion of the expense each year over a period of years.

6. You may deduct only the costs that are both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.

from IRS Tax Tip 2013-46: 

Tax Advantages for College Cash – Series 2 of 2

The American Opportunity Credit replaces the Hope credit.  It is for full-time students and is figured per student.  Your expenses incurred during the first four years of post-secondary education are used to determine the credit with a maximum credit is $ 2,500.  Up to 40% of this credit is Refundable, meaning you could receive a $ 1,000 refund even if you owe no tax!

The Lifetime Learning Credit can be used by any student from undergraduate to graduate or even course work to improve job skills.  Plus, the student doesn't have to be enrolled full time.  However, it is by taxpayer household, not per student.  Maximum credit is $ 2,000. 

Tuition and Fees Deduction is an adjustment.  Meaning it can reduce taxable income by as much as $ 4,000.  This can be used along with Coverdell ESAs and 529 Plans, as long as you paid for different educational expenses with various funds.  There are adjusted gross income limitations.

Student Loan Interest Deduction is another adjustment, allowing a reduction of taxable income by up to $ 2,500.  It has filing status and adjusted gross income limitations.

If you cashed in Savings Bonds to pay for education expenses, the interest could be tax-free.

Extensions

The April 15 tax-filing deadline is fast approaching. Some taxpayers may find that they need more time to file their tax returns. If you need extra time, you can get an automatic six-month extension from the IRS.

Extension:  

• You can file an extension for your personal income taxes resulting in an additional six (6) months to complete your return.  
• The new due date would be Oct 15th.
• The extension is for FILING only.
• There is no extension for any balance due.  
• Balance Due Payment is still required by April 15th.

Failure to File:  

• IRS will assess a Failure to File penalty.  
• Therefore, even if you owe you can avoid this penalty by filing.

Failure to Pay.  

• IRS will assess a Failure to Pay penalty.  
• A payment plan request with your return normally eliminates this penalty.

Tax Advantages for College Cash – Series 1 of 2

Educational 529 Plan contributions are not deductible on your federal return, but the money invested in the plan accumulates tax-free.  When you withdraw account funds to pay for qualified education costs, those distributions are not taxed.  There is a named beneficiary, so anyone can contribute to the plan. The plan can be rollover to another immediate family member for unused funds. 

All 529 Plans are administered by states, and every state now has at least one. You don't, however, have to limit yourself to your state's options. There may be an additional tax advantages for establishing a plan in your home state.

Coverdell Education Savings Accounts, or ESAs, were once known as education IRAs because the accounts operate much the same way.  Contributions are not tax deductible, but they and subsequent earnings can be withdrawn tax-free as long as they are used to pay eligible schooling costs.  They operate similar to the Educational 529 Plans, but there are contribution restrictions.  However, their distribution rules are flexible and can cover kindergarten to college.

Understanding your Tax Return – Series 2 of 2

Taxable Income is your overall, or gross, income reduced by all allowable adjustments, deductions and exemptions.  As the US Tax system uses progressive taxation with tax brackets starting at 10 percent and raising to 39.6 percent for the wealthiest taxpayers, the lower your taxable income the better.

Tax Liability is how much you owe in taxes.

Tax Credits are used to reduce Tax Liability.  Tax credits are more valuable than tax deductions because they directly cut the amount of tax you owe, rather than reducing the amount of taxed income.  However, once your tax liability is $0, they cannot be used.

Refundable Credits are the same as tax credits, except they are still eligible for refund when your tax liability is $0.  Meaning you will still get a refund, even if you owe no tax.

Withholding is the amount withheld for each time you are paid, paid in from previous year, or paid in as an estimate for current year.  It is the most common of all Refundable Credits.

-         If you are NOT required to file, but had Federal and/or State withholding, the only way to get a refund is to file a return.

Understanding your Tax Return – Series 1 of 2

Gross Income is all the income you receive over the course of the year, including wages, interest, dividends and capital gains.

Adjustments are items eligible taxpayers may deduct from Gross Income.  Some examples:  Contributions to a qualified IRA, Student Loan Interest, Tuition and Fees, Some Business Expenses, Moving Costs and Alimony Payments. 

Adjusted Gross Income, or AGI, takes Gross Income and subtracts any eligible adjustment.

Deductions are subtractions from AGI.

• The Standard Deduction is a fixed dollar amount determined by your filing status.  It is adjusted each year for inflation.
• Itemized Deductions include eligible medical, dental, and vision expenses; state, local and property taxes; mortgage interest; charitable contributions; casualty and theft losses; unreimbursed employee expenses; and other miscellaneous deductions such as gambling losses.  Some of these deductions must meet IRS limitation and all must meet IRS criteria.  An additional form is required for filing.

Exemptions are the amount you are allowed to subtract from your income to reflect your filing status and eligible dependent.