SIMPLIFIED METHOD FOR CLAIMING HOME OFFICE DEDUCTION
Individuals who maintain home offices will have an alternative method for computing their home office income-tax deductions for the 2013 tax year and beyond. The IRS has announced a new “safe harbor” deduction that is easy to calculate – and can help avoid the recordkeeping headaches normally associated with deducting home office expenses.
Background
In general, federal tax law prohibits a deduction for the business use of a dwelling that is also used by the taxpayer as a residence during the year. However, exceptions apply.
An individual may claim deductions for direct expenses and the business-use portion of indirect expenses relating to a home office if:
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Part of the home is used regularly and exclusively as (1) a principal place of business or (2) a place to meet or deal with customers or clients in the ordinary course of business.
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In the case of an employee, the use of the home office is also for the convenience of the employer.
Where space within the dwelling is used on a regular basis for the storage of inventory or product samples for use in the taxpayer’s business of selling products at wholesale or retail, the expenses are deductible if the dwelling unit is the sole fixed location of the trade or business.
These home office deductions are limited to the business activity’s gross income reduced by all other deductible expenses that are allowable regardless of business use (examples: mortgage interest, real estate taxes) and by business deductions that are not allocable to the home itself (examples: supplies, advertising expenses). Excess home office expenses can be carried forward to later tax years.
Currently, an individual must file a 43-line form (IRS Form 8829) to claim a home office deduction.
The New Rule
For tax years starting in 2013 (that is, for tax returns filed in 2014 and later), an individual maintaining a home office may use an optional safe harbor method for computing the home office deduction.
With this method, the taxpayer may determine the deduction for qualified business use of the home by multiplying a specified rate ($5 for 2013) by the number of square feet in the home used for business purposes, not to exceed 300 square feet. Therefore, the maximum deduction under the safe harbor method will be $1,500. The $5 rate may be updated by the IRS from time to time, as warranted.
Example: Jackie uses a 500-square-foot area in her basement exclusively as the principal place of business for her beauty salon. If Jackie elects to claim her home office deduction using the safe harbor method, she can only claim a deduction of $1,500 ($5 times 300, the maximum square footage allowed).
This safe harbor method is an alternative to deducting the actual expenses of maintaining a home office. Generally, a taxpayer using the safe harbor cannot deduct any actual expenses related to the qualifying business use of the home for that year. Exceptions apply for:
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Otherwise allowable residence-related deductions such as mortgage interest and property taxes (as long as the taxpayer itemizes deductions) and
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Non-home office business expenses.
An individual may elect each year whether to deduct actual home office expenses or use the safe harbor method.
Caution Is Required
One important thing to keep in mind is that, for many individuals, the safe harbor method will result in a smaller home office expense deduction than using the actual expense method. While the recordkeeping and reporting requirements are tougher, the actual expense method could result in a much higher deduction.
Moreover, if you are self-employed, a larger home office deduction could reduce your income for self-employment tax purposes as well as income-tax purposes. As a result, we recommend computing the deduction using both the actual expense method and the optional safe harbor method (starting with 2013’s return) to see which provides the larger tax benefit.
Satya Shaw, CPA, MBA, of Shaw Tax Advisory Group, can be reached at (o) 813-960-7429, (c) 901-550-2920, or e-mail [email protected]
Accounting
TAX Talk
It is that time again! Monday, April 15, 2013 is the due date for filing most type of tax returns including Individual, LLC, Trusts, etc.
Following are some of the checklists for the individual tax filings:
- Collect income data from all sources;
- Create/document a list of itemized deductions and credits;
- Document all the taxes you’ve already paid
- Verify personal/dependent exemption – for most taxpayers, it is $3,800 per person
- Verify standard deduction - $11,900 for married filing joint.
Additional standard deduction for blind people and senior citizens remains
$1,150 for married individuals/$1,450 for singles/heads of household.
- The foreign ‘earned income’ deduction rises to $95,100 in 2012
Don’t mess with ‘TAXES’: Pay close attention to forms such as:
- 1099-Misc: Non-employee compensation, rental income, royalties, Other income;
- 1099-B: Proceeds from brokers – stock and securities transactions;
- 1099-C: Canceled debts;
- 1099-DIV: Dividends – qualified dividends have a lower tax rate;
- 1099-INT: Interest – Interest on investments including bank interest, CD/money market;
- 1099-G: Government refunds or payments;
- 1099-Q: Education account distributions;
- 1099-R: Pension and IRA distributions; RMD (Required Minimum Distributions) If you’re over 70½ years old, you may be required to take an annual required minimum distribution from your IRAs by Dec. 31;
- 1099-T: Tuition fees paid.
Overlooked tax dedcutions:
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Charitable deductions: keep proper written receipts for documentation. Deductions allowed only for contributions to qualified organizations. Refer IRS publication 78 (Exempt organization Select Check)
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Non-cash contributions: you may have to fill out Form 8283, and attach it to your return, if your deduction for a noncash contribution is more than $500. If you claim a deduction for a contribution of noncash property worth $5,000 or less, you must fill out Form 8283, Section A. If you claim a deduction for a contribution of noncash property worth more than $5,000, you will need a qualified appraisal of the noncash property and must fill out Form 8283, Section B.
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Medical expenses: Generally, you may claim a deduction if the expenses are above 7.5 percent of AGI (adjusted gross income)
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Sales tax deduction in lieu of state income tax deduction: Taxpayers in states without an income tax, such as Florida may qualify for this deduction.
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Moving expenses: If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses but not any expenses for meals. To qualify for the moving expense deduction, you must satisfy two tests. Under the first test, the "distance test," your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.
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Tuition and Fees decution: You may be able to deduct qualified education expenses paid during the year for yourself, your spouse, or your dependent(s). You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. This deduction is taken as an adjustment to income. This deduction may be beneficial to you if you do not qualify for the American opportunity or lifetime learning credits.
LAST minute tax Savings: Tax planning is a year-round acitivity not just during April, however there is still time to save taxes on dedcutions like:
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Contributions to regular/spousal IRA or Roth IRA: For 2012, the maximum you can contribute to all of your traditional and Roth IRAs is the smaller of: $5,000 ($6,000 if you’re age 50 or older), or your taxable compensation for the year.
There are various limits on contribution based on wherther you are covered by an employment plan or if your income is high. You can’t make regular contributions to a traditional IRA in the year you reach 70½ and older. However, you can still contribute to a Roth IRA regardless of your age.
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Health Savings Account (HSA): Contributions can be made for tax year 2012. Be sure to specify the correct tax year for your contribution. For 2012, if you have self-only HDHP coverage, you can contribute up to $3,100. If you have family HDHP coverage, you can contribute up to $6,250.
April 15: File electronically and file extension if you cannot file the tax returns by due dates to avoid ‘late filing penalties’; also please be aware that an extension of time to file is not an extension of time to pay.
Estate and gift
For an estate of a person deceased duriong the calendar year 2012, the basic exclusion from estate tax amount is $5,120,000. The annual exclusion for gifts remains at $13,000.
There are various limitations and thresholds for many of the tax deductions. Please consult your CPA/Tax attorney/or tax consultant for proper guidance with the above subject matter.
DISCLAIMER: In accordance with IRS Circular 230, the above information is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.
Suresh Kumar, CPA, MBA is the Principal of Kumar Consulting, PA, a CPA & Consulting firm licensed in the states of FL, KS, & MO and can be reached at (813) 421-5068, e-mail [email protected] or visit www.kumarconsultingcpa.com