Home Office Deduction - Safe Harbor Method

Beginning January 1, 2013, taxpayers have the option of using the Safe Harbor Method for computing expenses for their home office deduction.

IRC Section 280A permits taxpayers to deduct expenses allocable to the business-use portion of a residence, including areas used for home office, for the storage of inventory or product samples, for providing day care to children or elderly or disabled individuals.

The home office deduction attributable to the dwelling unit are limited to the activity's gross income for the tax year reduced by deductions that are allowable regardless of the business use portion of the home.  Such deduction include qualified home mortgage interest, property taxes, casualty losses, and other allowable trade or business expenses not related to the dwelling unit.

In an attempt to reduce the administrative, recordkeeping, and compliance burdens of taxpayers, the IRS has offered a safe harbor method to compute the allowable deduction for the business-use portion of the home.  The safe  harbor  method is not in addition to the allocation of actual expenses of the home office, but rather serves as an alternative.

Under the safe harbor method, the taxpayer multiplies the allowable square footage of the home office by the prescribed rate of $5.00.  The allowable square footage cannot exceed 300 square feet, therefore, the maximum deduction is $1,500. The safe harbor deduction, similar to the actual expense allocation  method, cannot exceed the business income for the year reduced by business expenses unrelated to the dwelling unit.  Any taxpayer using the safe harbor method may not carry over any disallowed safe harbor deductions to the next year.  In addition, you cannot deduct any deprecation for the business-use portion of the home for that taxable year.  The depreciation deduction allowable for that portion of the home for the taxable year is deemed to be zero, and there is no reduction in the basis of the home for that year. The safe harbor method provides a technique to avoid recognizing un-recaptured Section 1250 gain upon a subsequent sale.  Because a taxpayer can claim the safe harbor method in one year and actual expenses in another, some years may reduce basis and contribute to un-recaptured section 1250 gain, while others will not.

The safe harbor method does not apply to any employee with a home office who received advances, allowances, or reimbursements for expenses related to the business use of a home.

Taxpayers using the safe harbor method may deduct 100% of mortgage interest and real estate taxes on Schedule A.

Contact me for further information!

Audry Rini of Double Entry Bookkeeping, LLC. Presented a "How-To" on Genealogy

Aficionado, sleuthhound., detective -terms that definitely describe VIC member Audry Rini, who gave a "how-to" presentation for Vermont Italian Club on tracing one's family roots. Motivated by the family stories her father always told, Audry has been successfully chasing her family names down rabbit holes for a good 35 years, long before the internet made it relatively easy and far more expansive.

 

The success of her adventures was made evident by a book she compiled on her family history -a book that definitely inspired the small group who came to learn from her experience at the Miller Center in May.

 

Research really does give evidence that a genealogist's study of his ancestral roots actually boosts his performance on intelligence tests! So get smart and follow Audry's recommendations for going on-line and beginning your own research: ancestry.com, Familysearch.org, rootsweb.com, italiangen.org, and cyndislist.com.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Tips on Making Estimated Tax Payments

 

Some taxpayers may need to make estimated tax payments during the year. The type of income you receive determines whether you must pay estimated taxes. Here are six tips from the IRS about making estimated tax payments.

1. If you do not have taxes withheld from your income, you may need to make estimated tax payments. This may apply if you have income such as self-employment, interest, dividends or capital gains. It could also apply if you do not have enough taxes withheld from your wages. If you are required to pay estimated taxes during the year, you should make these payments to avoid a penalty.

 

2. Generally, you may need to pay estimated taxes in 2013 if you expect to owe $1,000 or more in taxes when you file your federal tax return. Other rules apply, and special rules apply to farmers and fishermen.

 

3. When figuring the amount of your estimated taxes, you should estimate the amount of income you expect to receive for the year. You should also include any tax deductions and credits that you will be eligible to claim. Be aware that life changes, such as a change in marital status or a child born during the year can affect your taxes. Try to make your estimates as accurate as possible.

 

4. You normally make estimated tax payments four times a year. The dates that apply to most people are April 15, June 17 and Sept. 16 in 2013, and Jan. 15, 2014.

 

5. You should use Form 1040-ES, Estimated Tax for Individuals, to figure your estimated tax.

 

6. You may pay online or by phone. You may also pay by check or money order, or by credit or debit card. You’ll find more information about your payment options in the Form 1040-ES instructions. Also, check out the Electronic Payment Options Home Page at IRS.gov. If you mail your payments to the IRS, you should use the payment vouchers that come with Form 1040-ES.

Here are five credits the IRS wants you to consider before filing your 2012 federal income tax return:

A tax credit reduces the amount of tax you must pay. A refundable tax credit not only reduces the federal tax you owe, but also could result in a refund.

1. The Earned Income Tax Credit is a refundable credit for people who work and don’t earn a lot of money. The maximum credit for 2012 returns is $5,891 for workers with three or more children. Eligibility is determined based on earnings, filing status and eligible children. Workers without children may be eligible for a smaller credit. If you worked and earned less than $50,270, use the EITC Assistant tool on IRS.gov to see if you qualify. For more information, see Publication 596, Earned Income Credit.


2. The Child and Dependent Care Credit is for expenses you paid for the care of your qualifying children under age 13, or for a disabled spouse or dependent. The care must enable you to work or look for work. For more information, see Publication 503, Child and Dependent Care Expenses.


3. The Child Tax Credit may apply to you if you have a qualifying child under age 17. The credit may help reduce your federal income tax by up to $1,000 for each qualifying child you claim on your return. You may be required to file the new Schedule 8812, Child Tax Credit, with your tax return to claim the credit. See Publication 972, Child Tax Credit, for more information.


4. The Retirement Savings Contributions Credit (Saver’s Credit) helps low-to-moderate income workers save for retirement. You may qualify if your income is below a certain limit and you contribute to an IRA or a retirement plan at work. The credit is in addition to any other tax savings that apply to retirement plans. For more information, see Publication 590, Individual Retirement Arrangements (IRAs).


5. The American Opportunity Tax Credit helps offset some of the costs that you pay for higher education. The AOTC applies to the first four years of post-secondary education. The maximum credit is $2,500 per eligible student. Forty percent of the credit, up to $1,000, is refundable. You must file Form 8863, Education Credits, to claim it if you qualify.

Four Things You Should Know if You Barter

Small businesses sometimes barter to get products or services they need. Bartering is the trading of one product or service for another. Usually there is no exchange of cash. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services.

The IRS reminds all taxpayers that the fair market value of property or services received through a barter is taxable income. Both parties must report as income the value of the goods and services received in the exchange.

Here are four facts about bartering:


1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, annually. The exchange must give a copy of the form to its members and file a copy with the IRS.

2. Bartering income. Barter and trade dollars are the same as real dollars for tax reporting purposes. If you barter, you must report on your tax return the fair market value of the products or services you received.


3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.


4. Reporting rules. How you report bartering varies depending on which form of bartering takes place. Generally, if you are in a trade or business you report bartering income on Form 1040, Schedule C, Profit or Loss from Business. You may be able to deduct certain costs you incurred to perform the bartering.

Ten Facts about Capital Gains and Losses

 

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

Here are 10 facts from the IRS on capital gains and losses:

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.

 

2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.

 

3. You must include all capital gains in your income.

 

4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.

 

5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.

 

6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a 'net capital gain.’

 

7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people in 2012 is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.

 

8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.

 

9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

 

10. Form 8949, Sales and Other Dispositions of Capital Assets, will help you calculate capital gains and losses. You will carry over the subtotals from this form to Schedule D, Capital Gains and Losses.

Take Credit for Your Retirement

 

Saving for your retirement can make you eligible for a tax credit worth up to $2,000. If you contribute to an employer-sponsored retirement plan, such as a 401(k) or to an IRA, you may be eligible for the Saver’s Credit.

Here are seven points the IRS would like you to know about the Saver’s Credit:

 

1. The Saver’s Credit is formally known as the Retirement Savings Contribution Credit. The credit can be worth up to $2,000 for married couples filing a joint return or $1,000 for single taxpayers.

 

2. Your filing status and the amount of your income affect whether you are eligible for the credit. You may be eligible for the credit on your 2012 tax return if your filing status and income are:

• Single, married filing separately or qualifying widow or widower, with income up to $28,750
• Head of Household with income up to $43,125
• Married Filing Jointly, with income up to $57,500

3. You must be at least 18 years of age to be eligible. You also cannot have been a full-time student in 2012 nor claimed as a dependent on someone else’s tax return.

 

4. You must contribute to a qualified retirement plan by the due date of your tax return in order to claim the credit. The due date for most people is April 15.

 

5. The Saver’s Credit reduces the tax you owe.

 

6. Use IRS Form 8880, Credit for Qualified Retirement Savings Contributions, to claim the credit. Be sure to attach the form to your federal tax return. If you use IRS e-file the software will do this for you.

 

7. Depending on your income, you may be eligible for other tax benefits if you contribute to a retirement plan. For example, you may be able to deduct all or part of your contributions to a traditional IRA.