Tax Facts

Information to help individuals and small business navigate our complex Tax Laws. Not to be construed as tax advice. Contact your hired tax advisor for your specific tax situation and advice.

Safe Harbor Home Office Deduction

A taxpayer (either a business owner or an employee) may elect a simplified method to compute the home office deduction for tax years beginning on or after January 1, 2013 without having to substantiate, calculate, and allocate deductible home office expenses. This is referred to as a safe harbor method of taking the home office deduction.

Under the safe harbor, the deduction is equal to $5.00 times the number of square feet of the home office. It is limited to a maximum of 300 square feet. So even if your home office is 500 square feet, the maximum deduction you can take is $1,500. Additionally, the deduction cannot exceed the taxpayer's gross income from the business (and this has to be calculated as a percentage if you are conducting your business elsewhere for parts of the day, week or year).

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Are Traveling Expenses Tax Deductible?

In general, a taxpayer may deduct ordinary and necessary traveling expenses incurred while away from home in the conduct of a trade or business. Internal Revenue Code Section 162(a)(2) and Treasury Regulation Section 1.162-2 allow for a deduction when individuals are away from home if it is reasonable for them to need to sleep or rest while their duties require them to be away from the general area of their tax home for a period substantially longer than an ordinary workday.

It doesn't always have to be that you are away for more than 24 hours. In some cases, travel expenses may be deductible even though you are away for part of the day. So, for example, a pilot that flies a charter trip and needs to rest because of duty time limits.

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Tax Deductible Car Expenses

Did you know that expenses for fuel, oil, tires, repairs, insurance, depreciation, parking fees and tolls, licenses, and even garage rent incurred for cars used in a trade or business are deductible? They are, but only to the extent the expenses are attributable to business use.

Keep in mind that these expenses must be substantiated with an exact record of the amount paid for fuel, insurance, etc. You also have to keep a mileage log of where you went, number of miles driven, and the business purpose for the trip. In lieu of calculating the operating and fixed costs for business purposes, taxpayers may use the standard mileage rate method as a simplified way to compute deductions for car expenses. So instead of adding up all the actual expenses, you simply take the total business mileage for the year and multiply it by a standard rate. For 2016 the standard mileage rate is 54 cents per mile. Even if you use the standard mileage rate method for calculating your deduction, you still have to keep a mileage log. It is the first thing an auditor will ask for when he or she sees a car expenses deduction. If you don't have one, you'll likely lose the deduction altogether and consequently have to pay tax on the added income.

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Startup Business Deductions

If you are starting a business, be careful that you do not spend too much before you technically "start" the business. Of course, you have to do some spending, but you are limited to $5,000 in business startup costs on your first year's tax return. Any overage is amortized over 180 months (yes, that's 15 years!).

What is the startup phase? That depends on a number of factors and it can differ for each individual business, since each one is unique. However, generally, you are in the startup phase during development and planning of the business. Once you become operational - generally when you are available for hire (and not necessarily that anyone has yet hired you) - then your expenses are considered those of a business in operation (and no longer "starting up").

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Can I Deduct IRA Investment Fees?

Check your IRA statement for investment or custodian fees. If you are being charged investment fees in such an account you may be wondering if you can deduct those fees on your tax return. The answer is "it depends." There are some fees that are deductible, but only if they were paid with non-IRA funds. That means you must tell your IRA custodian that you want to write a separate check to pay for those fees. By doing so, your payment is considered a tax deductible investment fee and not considered a contribution to the IRA.

What are those fees? If you are charged an annual fee, this may qualify for the deduction (usually an annual fee to manage the IRA). However, if your custodian charges you a fee according to a percentage of assets under management (AUM) - this fee would be considered part of the IRA contribution you made and is not deductible (because it is already coming from a tax-free contribution).

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Home Office Deduction by Employees

Let's say you're an employee of a business and you use your home office exclusively for business work that you do at home. Can you take a home office deduction? The answer is yes, but to qualify, you must not only meet the exclusive use requirement but your use of this office must also be for the convenience of the employer (and not just your own).

Generally speaking, your home office expenses are subject to the 2% floor of your adjusted gross income. And it only applies to those taxpayers who itemize their deductions. There is an exception to this rule, only if your are classified as a statutory employee. This is not a common status for employees; but if it applies to you, the deduction is not subject to these limits.

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Taking Deductions for Your Leased Vehicle

If you use your vehicle for business purposes and you lease this vehicle, you may be wondering if you can deduct the lease payment on your business tax return. If you are a sole proprietor or single member LLC, you may choose to lease your business vehicle and the business percentage of use - and the lease amount - is deductible on your business tax return (Sched C).

But it doesn't end there! IRC Section 280F(c)(2) requires that the proprietor include the deduction amount as rental income for the vehicle (essentially as if you are renting that business portion to the business). It is sometimes referred to as an offset of that deduction or the "leased vehicle income inclusion."

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Standard Mileage Rates for 2016 Taxes

The standard mileage rates allowed for deductions on your 2016 tax return depend on the purpose for which you drove those miles. The standard mileage rate allowed for operating expenses for a car when you use it for business purposes is 54 cents a mile. If you used your car for medical reasons (driving to your doctor or the lab) the standard deduction is 19 cents a mile. The rate for driving to perform volunteer work for certain charitable organizations remains unchanged at the 2015 rate of 14 cents a mile. Remember to keep a mileage log and categorize your mileage accordingly. Without one, your deduction is generally disallowed in an audit.

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Taking Your RMD from an IRA

Did you take an RMD from your IRA? It may seem like alphabet soup, but it is an important check you should make each year if you are over 70. Once you reach 70 and a half, you are required to start taking distributions from your IRA. This is called an RMD or Required Minimum Distribution. And it is just that - an amount of money you are required to take out of the IRA in the calendar year. If you don't take the distribution by December 31 (last day of the calendar year) you will incur a penalty on your tax return for not doing so. That penalty is steep: 50% of your RMD! Call your tax advisor and your financial advisor to determine your IRA status and make sure you don't end up giving half of it to the IRS!

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Tax Effects of Divorce

Income tax may be the last thing on your mind after or during a divorce. However, this event can significantly affect your taxes. Alimony and a name change are just a few items you may need to consider. Here are some key tax tips to keep in mind if you are recently divorced or separated.

• Child Support — If you are making child support payments, they are not deductible. If you receive child support, the amount you receive is not taxable.

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Tax Benefits for Military Members

There are many tax benefits for members of the military, their families and disabled veterans. Here are tips designed to help service members and their families take advantage of all tax benefits allowed by law.

• Certain combat pay can be excluded from income.

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Do You Need to File a Tax Return?

Many potential clients call to ask me to help them determine if they are required to file a federal tax return at all or if they should file to receive a refund. This is a question that requires additional information to be accurately answered.

Some of the questions I ask are: what will be your filing status? Do you have a W-2 or 1099 Misc document from your employer or contract work? Was any federal income tax withheld from your paycheck or did you pay in any estimated self-employment taxes on your contract income?

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Taxes and Deductions on Gambling Income

It's a common misconception that unless you receive a Form W-2G at a casino, your gambling winnings don't have to be reported at the end of the year on your federal tax return.

However, like any other income, regardless of whether or not you received documentation at the time it was earned (or won), all income must be reported on your federal tax return.

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Health Premium Tax Credit

Do you currently receive an advanced payment on the premium tax credit? If you do, be sure to report any changes in your circumstances to the Health Insurance Marketplace Exchange.

If your income has increased, you may be eligible for a smaller payment. If you don't report the change, then you'll have to make a reimbursement of this overage when you file your tax return.

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Un-filed Tax Returns

There are several reasons for filing your past due returns now. Regardless of whether or not you are able to pay your tax liability in full, you should file all tax returns that are due. File your past due returns the same way that you would file a timely return.

Here are just a few good reasons to collect your records, receipts and file:

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Debt Cancellation and Taxes

Is cancellation of debt income always taxable? No. The most common circumstances that allow for the debt forgiveness income to be non-taxable is when it is for a qualified principal residence, debts discharged through bankruptcy, if you are insolvent when the debt is cancelled. The insolvency calculations can become complex, so you may want to talk to a tax advisor about helping you with that. 

Certain farm debts and non-recourse loan forgiveness often fall into the non-taxable category, as well.

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Military Reservist Expenses

Are military reservists allowed travel expenses? Yes.  Military reservists are allowed to deduct travel expenses as employee business expenses (subject to the 2% of AGI floor) for travel when it is necessary to stay away from home overnight in connection with reserve service.

An above-the-line deduction (an adjustment to income) is allowed for military reservist non-reimbursed travel expenses when the reservist served when more than 100 miles away from home and they stay overnight.

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Tax Deductible Flying Lessons?

The cost of flying lessons to become a pilot, or to earn an additional ratings can be deductible. How? it mostly depends upon the purpose of the flying lessons or additional ratings. If the purpose of the education falls under the rules that apply to educational expenses in the IRS regulations, then it can be deductible. Generally, this means the education must either maintain or improve skills in the taxpayer's trade or business or the education (or new skill, ratings, etc.) is required by law or required by the taxpayer's employer.

For example, paying for lessons or instruction to maintain currency in your licenses would seem to easily fall under the "maintain" requirement.  The cost of improving your piloting skills and safety by getting IFR qualified would seem to easily fall under the "improve" category. 

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Standard Mileage Rates for 2016

The IRS has just issued Notice 2016-1 in which is provided the optional 2016 standard mileage rates for taxpayers to use in computing the deductible costs of operating a vehicle for business, charitable, medical or moving expense purposes.  It also provides the amount taxpayers must use in calculating a reduction to their basis for any depreciation taken under the business standard mileage rate.

Those rates are as follows:

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Clergy Tax Preparation

If you are an ordained minister (ordained, commissioned or licensed), your tax return can present issues, especially if your payroll reporting was not done correctly.  This is not uncommon, as ministers are considered "dual-status" employees. The dual-status simply means that a minister is treated both as an employee on a W-2 and as a self-employed individual, subject to Self Employment tax.

This can be confusing, especially if your church accounting department is not familiar with the tax law regarding ministers and reports your payroll incorrectly.  Some church bookkeepers put all of a ministers wages on a 1099, thinking that if the minister is self employed, the wages should be reported there. Not true. Almost all ministers/pastors are not self employed in all of their aspects of ministry.

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