1. Social Security info
What’s on your Social Security card goes on the return – if your name is wrong there or has been changed, contact the
Social Security Administration. Getting your number wrong, or that of a dependent or spouse, is even worse: The number might belong to someone else. This kind of error can completely stop the whole process.
2. Math
Software can help, but not every program spells out every step of the process. In some cases you may still have to tally numbers on the side to enter totals. When you do, triple-check your work.
3. Signature
It’s like turning in homework without your name on it: no name, no credit. Make sure you sign your return – and the check, if you’re sending one. Otherwise you may face delays or penalties.
4. Wrong form
Again, software often helps here by picking the relevant forms. But sometimes using a 1040EZ won’t get you as much money as a 1040 or 1040A. And certain situations require additional forms or numbers in different places. For instance,
where you claim a home office deduction differs depending on whether you are an employee, self-employed, or a business partner.
5. Paying
There are a lot of tax software options, with varying fees for preparing, filing, and amending, not to mention state returns if that applies. But if your income is under $51,000, chances are you can get your taxes prepared and filed for free.
2012 income below $51,000? Free in-person help
Check out the
IRS’s Volunteer Income Tax Assistance program, or VITA. They offer free preparation from trained volunteers, complete with information on tax credits you might qualify for. Most include free electronic filing as well.
There are thousands of locations across the country in schools, libraries, malls, and community centers. You can look up
free tax prep locations by ZIP code – there were five within as many miles in my area, and only one required appointments. You can also call 1-800-906-9887 to find a location.
Although many take walk-ins – providing they show up with all their paperwork – it’s probably a good idea to make an appointment just in case. The closer to Tax Day (April 15) we get, the more hectic things will be.
6. Going pro
If you have a simple tax situation that hasn’t changed much since last year, there’s no reason to pay a professional: All they’re going to do is use the professional version of software you can buy (or get free) yourself.
7. Waiting on a check
Filing your return electronically through the IRS Free File is always free, no matter your income. But however you file, do it electronically and sign up for direct deposit and your refund will most likely hit your account in less than two weeks. Just don’t forget to triple-check your bank account number to make sure the money doesn’t end up in someone else’s account.
8. Hiding income
This can happen accidentally if you have multiple employers, or if a W2 or 1099 goes missing. So take your time, think it through, and make sure you report everything – not just from your job but also investments and
anywhere else that might be reporting to the IRS. Ideally you’ll track this throughout the year so you can’t forget.
9. Missing deductions and credits
Polonius from Hamlet said, “Neither a borrower nor a lender be.” He was a jerk.
But he was right too – don’t leave money on the table, at least not for the government. Did you buy a home in the past year? Go back to school? Life changes and major purchases may mean tax benefits. And don’t forget to see if you can
claim a home office deduction.
Exclusive use
IRS Publication 587 says, “To qualify to deduct expenses for business use of your home, you must use part of your home … exclusively and regularly as your principal place of business.” That sounds straightforward, but there are some key terms that aren’t spelled out. The first of these is “exclusively,” and here’s how it works.
- The space can be as small as a desk or as big as a room – there’s no size requirement, and there don’t have to be walls or partitions marking it off. It just has to be a “separately identifiable space” and used exclusively for business.
- The space you want to deduct expenses for cannot be used for personal purposes – so the couch you watch TV on doesn’t count, and even if you do all your accounting in the dining room, eating there nixes the deduction.
- You can ignore the previous point if the business use is “storage” or “daycare,” but there is an entirely different set of requirements you have to meet. Storage space has to be for product inventory you intend to sell, and your home has to be “the only fixed location” of your business. So you don’t qualify if you’re just storing extra business equipment, or operate in a commercial space and keep spare stock at home. Daycares have to meet and maintain state licensing requirements – you can’t claim the deduction just because your kids are always running in and out of the office.
- Like independent contractors or sole proprietors, employees can deduct home office expenses – but there are additional restrictions. Your use has to be for the company’s convenience (because they lack space, for instance) instead of yours (it’s easier to work from home). You also can’t double-dip by renting the space to your employer and claiming the deduction: it’s one or the other.
Primary/principal place
The other major tricky term is “principal.” Here’s what the IRS means by that…
- It’s OK to have more than one place of business and claim the deduction. But you can only claim the home office if it’s where you do the majority of the work, or certain kinds of work. Fail this test? Don’t stop reading yet, because…
- Even if your home office isn’t where you spend the most time or do the most important part of your job, it’s still a valid deduction if you use it “exclusively and regularly for administrative or management activities” such as billing, record keeping, ordering, writing reports, or booking appointments. So people like plumbers, whose job is to visit other people’s homes and businesses for a living, can still potentially claim the deduction.
- There are several situations that don’t automatically disqualify your home office, including: having somebody else handle the administrative stuff, handling those kinds of tasks minimally outside the office or while traveling (“places that are not fixed locations of your business”), or primarily using your home office for administrative tasks even though another place in your business has ample space for them.
- Another big exception for doctors, dentists, attorneys, and many other professionals: If part of your home is used exclusively and regularly to meet with clients, patients, or customers, it still qualifies for the deduction without being your primary place of business. But telephone or video calls and occasional visits don’t count – you have to meet in person, regularly.
- It’s OK to take a partial deduction if you met the requirements only for part of the year – just make sure you get the math straight.
Figuring the deduction
If you thought all the allowances and exceptions were messy, at least the
IRS has a flow chart for that.
The hard part is doing the math, which isn’t quickly summed up. If you use tax software, you have a leg up. If not, you may need a
free home office deduction calculator, a tax pro, or a little patience.
Determining if an expense is deductible. These
general rules apply to determine whether an expense is deductible.
- Only to home office. If a given expense pertains only to
the home office, the entire expense will be deductible as a "direct" home office
expense. For example, the cost of window treatments installed only in your home
office to ensure privacy for clients would be a direct expense
- Entire house. If the expense applies to the entire house,
it's an "indirect" home office expense and only a proportionate part of it will
be deductible. Heating, air-conditioning, rent or mortgage payments are examples
of indirect expenses.
- Non-business portion. If the expense applies only to the
non-business portion of the house, none of the expense will be deductible. An
example of a nondeductible expense would be remodeling the master bathroom to
install a personal sauna.
If you only operated your business for a portion of the year (which is nearly
always true in the first and last year of a business), you may only deduct
expenses for the portion of the year in which the office was used.
Portion of insurance
cost is deductible. You may deduct the
business percentage
of your homeowner's or renter's insurance as part of the home office
deduction.
Do not include the costs of any
business insurance you carry or special home office policy riders in this
figure. Those costs apply specifically to the business portion of your home, and
are
fully deductible as ordinary business expenses, not as part
of the home office deduction. This distinction can become important if your home
office deduction is
limited by the amount
of your business income.
Business portion of
utility and maintenance costs can be deducted. As a general rule,
you can deduct the
business percentage
of your utility payments for heat and electricity, and for services that pertain
to the entire house such as trash collection, security services, and maid or
cleaning services.
Lawn service payments do not qualify. IRS regulations indicate that lawn
service is generally not deductible as part of the home office
deduction, even when the home office is used as a meeting place with clients
(who presumably view the lawn as they enter the residence.)
If you pay for a utility or service that's not used in your business at all,
you can't deduct any portion of the expense. For instance, if you buy propane
fuel that is used only in your kitchen and your business does not involve
cooking, no part of the propane bill is deductible.
If you believe that your business accounts for significantly more (or less)
of a particular utility, you should increase (or decrease) your business
percentage of that utility bill accordingly. This is not an exact science, and
the IRS will accept a reasonable estimate--especially if you can provide a sound
justification that is supported by accurate calculations.
Anne is a cosmetics company representative who qualifies for the home office
deduction. Her $400 electric bill covers lighting, cooking, laundry and
television. Only the lighting is used for business. She figures that $250 of the
bill is for lighting alone. Because she uses 10 percent of the house for
business, $25 may be deductible as a business expense. However, if Anne can
establish that she installed special lighting necessary for her work and that
lighting uses more power than ordinary lighting, she may be justified in
claiming more than 10 percent of that bill as a home office deduction.
Second telephone line
can be deducted. Telephone bills are considered direct business
expenses, and are not part of the home office deduction. Therefore, you may be
able to deduct a portion of your home or cellular phone bill even if you don't
qualify under the
home office rules.
However, you can't ever claim any deduction for the basic telephone service
on the first telephone line in your home, or on your cellular phone. These are
considered to be personal expenses that you would incur even if you did not own
a business. Even though you can not deduct the cost of the telephone service,
you
can deduct any separately stated charges for local or long distance
business calls. You can also deduct the cost of bringing a second phone line
into your home, if you use the line exclusively for business.
Apportioning Expenses Required If Expenses Benefit Entire House
The deductibility of an expense depends upon whether it benefits just the
home office, your entire house including your home office or portions of the
house that do not include your home office.
Expenses that exclusively benefit your business (for example, repairing the
drywall and repainting a former bedroom that is now your office) are considered
"direct" home office expenses.
Direct expenses are fully deductible. Expenses that benefit the entire home
(for example, patching the roof so it doesn't leak, or re-carpeting the entire
house) are considered "indirect" home office expenses that are proportionately
deductible based upon the percentage of business use of the home.
Expenses that benefit only the personal portion of the home (for example,
installing a whirlpool tub in the master bedroom suite) are not deductible at
all.
Rent, Interest, Taxes Must Be Apportioned
For both renters and homeowners,
the deductible portion of the rental, tax, or interest payments depends on
the
percentage of the
home's space that is used for business. If you start or stop using the
office during the year, the
percentage of
time that the office is used will also be a factor.
The home office deduction can be a real tax
break for those who rent their home. Unlike a home owner, can claim an itemized
deduction for mortgage interest and real estate taxes, the renter doesn't get
any type of deduction for rent paid. However, if a renter can qualify for the
home office deduction, the portion of rent attributable to the business use of a
their home is deductible.
Mortgage interest.. Homeowners may deduct a portion
of both real estate taxes and qualified mortgage interest (but not principal)
payments on the home. Because mortgage interest and real estate taxes are
deductible without regard to the home office deduction, the real advantage of
the home office deduction for homeowners is that it converts an itemized
deduction into a far more tax-advantaged business expense deduction. Homeowners
can also claim a depreciation deduction to recover some of the home's purchase
price.
Qualified mortgage interest may include interest on a second mortgage, or a
home equity loan. However, there are dollar limits that apply. Only interest on
mortgages up to $1,000,000 ($500,000 if married filing separately) used to buy,
build, or improve your property, and interest on home equity loans up to
$100,000 ($50,000 if married filing separately), is considered "qualified." If
you think either of these limits might apply to you, consult your tax advisor or
get IRS Publication 936,
Home Mortgage Interest Deduction, for more
detailed information on computing your deduction.
Real estate taxes include the amount of taxes actually paid to the taxing
authority on your behalf during the year. This may be different from the amount
that your mortgage holder requires you to pay into an escrow account. Real
estate taxes do not include amounts paid to any homeowner's association or
condominium association. They also don't include assessments for local benefits
like streets, sidewalks, or water and sewer systems - instead, these amounts may
be depreciated.
Of course,
homeowners would be able to deduct all their real estate taxes and qualified
mortgage interest as itemized deductions, regardless of whether they use their
home for business purposes. However, claiming these expenses as part of the home
office deduction shift them from an itemized deduction to a deduction from gross
income. This is far more beneficial in reducing tax liability.
Another major advantage to this is
that by claiming these amounts as a business deduction, you reduce the net
income on which you must pay
self-employment
taxes.
Furthermore,
claiming the home office deduction means that some of your real estate taxes and
mortgage interest will be used to reduce your adjusted gross income (AGI), which
in turn can improve your eligibility for numerous tax benefits
including IRAs, miscellaneous itemized deductions, and the deduction for medical
expenses that exceed 7.5 percent of AGI.
Claiming Home Office Depreciation
If you qualify for the home
office deduction and you own your home, you can't directly deduct the price you
paid for the home, the principal payments you make on the mortgage, or the fair
rental value of the home. Instead, you can recover the cost of the business
percentage of the home through depreciation deductions. (Note that depreciation
is not a factor if you use the
simplified method
to determine your home office deduction.)
Depreciation is a way to recover the cost of an asset over its useful life.
Rather than deducting the entire cost of a piece of property in the year of
purchase, you deduct a portion of it each year, using methods and tables
established by the IRS.
There is no
doubt that calculating and tracking depreciation is a real headache. However, if
you are going to claim a home office deduction it is critical that you do
so.
Why? Because
whether you claim depreciation or not, the IRS is going to require that you
reduce the gain received on the sale of your home by the amount of depreciation
that you should have claimed.
If you
don't claim depreciation, you lose out twice—first, by not lowering your annual
tax bill by the largest amount possible and, second, by reducing the amount of
gain that you can exclude from income when you sell your home.
If you are not
going to realize significant overall savings from claiming the home office
deduction (for example, the business use percentage for your home is only five
percent) then you may want to consider foregoing the deduction. Work with your
tax professional to generate various scenarios so you plan not only for this
year, but for years down the road.
Depreciation Based on Home's Tax Basis
Before you can calculate the dollar amount of your depreciation, however, you
will need to know the tax basis of your home.
To determine your home's tax basis, you start with
the
lower of:
- the home's fair market value at the time you begin using the home office, or
- the cost of the home (not including the cost of the land underneath it),
plus the value of any permanent improvements you made before using the home
office, and minus any casualty losses you deducted before using it.
In many cases, you'll be using the second of the two items listed above, but
if you suspect that your home has slid down in value since you bought it, you
should have an appraisal done when you start using the home office in order to
fix the fair market value at that point in time.
The cost of the home generally includes not only the price you paid to the
seller, but also various closing costs and settlement fees. The more common of
these are abstract fees, installation of utility services, legal fees, recording
fees, surveys, transfer taxes, title insurance, and any amounts you agree to pay
on behalf of the seller such as back taxes or interest, sales commissions, or
charges for improvements or repairs.
However, you may
not include are insurance premiums, rent
for occupancy before closing, and charges connected with getting a loan such as
mortgage insurance, credit reports, appraisal fees, loan assumption fees, and
points.
You must reasonably allocate the total costs of the property between the land
and the buildings on it to compute your tax basis for depreciation. If your
sales contract did not explicitly allocate the price, you should allocate the
costs on the basis of the fair market values of the land and buildings at the
time of purchase. Your realtor or insurance agent may be able to help you make a
reasonable estimate of fair market value.
Your tax basis must be multiplied
by the
business use
percentage of your home, to arrive at the amount you can depreciate.
Once you know the tax basis of the depreciable portion of the home, you
multiply it by a fraction determined by the IRS, based on the month and year you
began using the home for business. Tables showing these fractions are available
in IRS Publication 946,
How to Depreciate Property. Generally speaking,
for real estate that you began using for business on or after May 13, 1993, the
depreciation period will be 39 years and in every year but the first and the
last, the applicable fraction will be .02564. For the first and last years, the
fraction will depend on the month in which business use began or ended.
If you began using your home office before May 13, 1993, continue using the
depreciation method that you originally started out with.
Repairs Are Deducted, Improvements Are Depreciated
If you can claim the home office
deduction, then you can deduct a portion of your repairs. Generally the cost
of
capital
improvements must be added to the basis of the property. However, unlike
most homeowners, you can claim depreciation on your home--but only on the part
used as a home office.
It's sometimes difficult to distinguish between a repair, which is deductible
(fully or partially) in the year it was done, and an improvement, which must
be depreciated over the course of property's useful life.
According to the IRS, an improvement
- materially adds to the value of your home,
- considerably prolongs its useful life, or
- adapts it to new uses.
In contrast, a repair merely keeps your home in ordinary efficient operating
condition; it does not add to the value of your home or prolong its life. If
repairs are done as part of extensive remodeling or restoration, the entire job
is considered an improvement.
Generally
speaking, patching walls and floors, painting, repairing roofs and gutters,
fixing a furnace or air conditioner, and mending leaks would be considered
repairs. Installing new flooring, roofs and gutters, furnaces, or air
conditioners would be considered capital improvements.
Capital Improvements Must Be Depreciated
If, after you begin using your home for business, you make a significant,
permanent improvement to the property (as opposed to a repair) you will need to
depreciate this capital expenditure as well. For example, if you put on a new
roof or buy a new furnace for your home, you would depreciate the business
percentage of the cost of the improvement over 39 years, beginning with the
month and year of installation.
If you use any
part of your home for business, you must adjust the basis of your home for any
depreciation that was allowable for its business
use, even if you did not claim it. Also, you must reduce the
gain that can be excluded upon the sale of the home by the amount of
depreciation allowable--even if you did not bother to claim it.
Special Rules Govern Home Office Casualty Losses
If you
qualify for the
home office deduction and your home office is damaged or destroyed by a burglary
or a disaster such as a hurricane, flood, fire, accident, riot, or vandalism,
you may be able to deduct some of your losses as part of the home office
deduction.
Casualty losses
imply a sudden, accidental, or unusual loss. Casualty losses do not include
damage from pets or progressive losses to property such as damage from erosion,
termites or other insects, wood rot, and similar slow-moving causes.
If the loss occurs only to the
home office, treat it as a "direct" expense that is fully deductible. If it
applies to the entire home, you will need to allocate the amount between the
home office portion of your house and the personal use portion. You make the
allocation based upon your
business use
percentage. If the loss occurred only to the nonbusiness part of the home,
you may not deduct any of it as a business expense, although you may be able to
deduct it as a personal expense.
A severe hail
and wind storm caused extensive damage to the roof of your home. The business
use percentage of your home is 10 percent. Therefore, only 10 percent of the
casualty loss will be deductible as a business loss. The remainder may be
deductible as a personal casualty loss.
In addition,
the wind caused a tree to fall through the picture window in your family room,
which is not part of your home office. The amount of this loss is not prorated
between the home office and the residence.
Insurance reimbursement affects loss deduction
amount. To claim a casualty loss you must file a timely claim for
any insurance you have on the property, and you can only deduct the portion of
the loss that is not reimbursed by insurance.
If the reimbursable amount has not been determined by the time you need to
file your tax return, compute your losses using the amount that you reasonably
expect to eventually recover from the insurance company. If your estimate is
incorrect, you can treat any additional reimbursement as income in the year you
actually receive it, or file an amended return for the year of the loss if you
don't recover as much as you expected.
If you recover
more insurance money than your adjusted basis in the property at the time of the
loss, you may actually have a taxable gain unless you purchase replacement
property within two years, or within four years if the loss occurred to your
main home located in a federally declared disaster area. See IRS Publication
547, Casualties, Disasters, and Thefts, for more details.
Business Loss Rules Are More Tax-Advantaged
The rules for deducting casualty losses are more favorable for business
property than for personal property.
For one thing, losses on personal property are subject to two thresholds: a
$100 per occurrence threshold, which means that the first $100 is not deductible
at all, and a 10 percent of adjusted gross income (AGI) limit. In other words,
after the first $100 is subtracted, you can only deduct the portion of the
remaining loss that exceeds 10 percent of your AGI. Neither of these limits
apply to casualty losses on business property.
Secondly, business casualty losses are measured using slightly different
rules. For both kinds of losses, if the property is only damaged, you must take
the
lower of the decrease in the property's fair market value
(FMV) as a result of the loss, or the property's adjusted basis before the
casualty loss. From this you subtract any insurance reimbursement, to arrive at
the amount of loss.
If personal property is completely destroyed, start with the lower of the
property's FMV or adjusted basis before the loss. But if business property is
completely destroyed, start with the adjusted basis before the loss minus any
salvage value; the property's FMV is not considered.
In order to claim a casualty loss on your home office, you must compute the
loss both ways. First, compute the amount of loss that you'd be allowed to
deduct if the office was
not used for business, using the $100
and 10-percent-of-AGI thresholds described above. Then, compute the amount of
loss on the home office as a business expense. The easiest way to compute these
two amounts is to use IRS Form 4684,
Casualties and Thefts, as a
worksheet. Complete Part A as if the loss were on personal property, and then
complete Part B as if the property were business.
While the amount that would be deductible as a personal loss (as shown on
Part A) is always deductible as an itemized deduction, the difference between
the personal loss and the business loss will only be deductible this year if
your business income is sufficient to cover all your business expenses. If not,
you can carry over the excess and deduct it next year.
Casualty losses reduce property's tax basis. Your
deductible casualty losses must be used to reduce your tax basis in the business
portion of the home. For the year of the loss and for subsequent years, you will
need to use this new basis in calculating your depreciation deductions. For more
information, see IRS Publication 946,
How To Depreciate
Property.
10. Taking out a refund loan
If you’re desperate for your refund money, realize the interest charges on a refund anticipation loan or check only make things worse. Read why in our story from last year,
Kiss Refund Loans Goodbye, and learn about a better idea: changing your tax withholding so you get bigger paychecks year-round.
11. Procrastinating
Tax Day is April 15 – and many people have already received their refunds. From the date this article was published, you have 53 days to get the job done right. So don’t short-change yourself literally and figuratively by waiting until the last minute, and then rushing through it. That’s how you make dumb mistakes and forget things that could have lowered your bill or gotten you more back.
12. Blowing it
Once you get your refund, don’t make the mistake of misspending it. Use it wisely: to pay down debt, get tax advantages for next year, or at least do something memorable and fun. Whatever you do, don’t fritter it away. We’ll have a story next week on smart uses for your tax refund.
I do not declare I am a tax expert. These information was given by the name below:
Exerts from Money Talks
NEWPORT NEWS -- Geoff Tennille and his wife Martha are pretty savvy shoppers.
