Easy Way to Home-Office Tax Deductions

Being self-employed you essentially have two hurdles to clear to get home office tax deductions approved and accepted by the IRS. The first hurdle is pretty much straightforward: You must use the home office space regularly and exclusively for your business. Regularly means indeed often, rather than occasionally. More important, exclusively means exclusively – no if’s, but’s or whatever about it. You can have absolutely no personal use of it during the year (or at least none that you admit to in public). Even admitting that you use the office space at home to balance your personal check book will void the tax deducation for the home office. So, be carefull with what you do and how you do it to avoid stepping into trap.

The second tax hurdle is much higher than the first, but there are four ways to get around it.

The first way is if your home office is your principal work place of business. This means that you do most of the work there. This is usually no problem at all for people that do work 100% self-employed with no income from any other sources (as employees that is). The home office also qualifies as your principal place of business (meaning it’s deductible) if you use it for administrative and management activities, but do actual customer facing work at the customer’s office. So, if you run your business from home, but do actual work at customer locations you are safe to deduct your office. A third exemption applies if you use the home office to meet with clients at your home office location.

And last but not least there is a 4th option to deduct expenses of your home office. If your home office is in a building that is separate from your home, it qualifies. That means setting up your home office in a detached garage or outbuilding will help you to qualify for this big tax deduction. But keep in mind that you must use your home office exclusively for your business, and you must do so regularly.

What is a Home Office worth when it comes to tax deducations?
Let’s assume you pass all the former scenarios. Now you want to know what the home office can do for you in regards to tax deductions. For sole proprietors, this can be estimated through Form 8829 (Expenses for Business Use of Your Home).

You can deduct 100% of expenses that are directly related to the home-office space — for example, painting, cleaning and the insurance premium for a home-office on your homeowner’s insurance policy (you did not forget about this one, didn’t you). The same applies for your office telephone line and utilities, if you have separate hookups for the home office.  You are also allowed to deduct a percentage of indirect expenses that relate to your entire residence. These deductions include parts of the mortgage interest, your property taxes, home owner association fees, or parts of your rent if you don’t own your home, depreciation if you do (depreciation over 39 years), utilities (water, gas, electricity), home security monitoring, or even things like the garbage pickup, general house maintenance and house repairs, insurance and so forth. You get the idea.

So, now that you know what you can deduct you need to figure out how much of your indirect expenses you can write off. IRS Form 8829 makes you believe you must use square footage, and most people do so. Count only living space in figuring the percentage (not your garage, unfinished basement or covered patio). Also, if you have a bathroom adjoining your office that’s never used otherwise, treat the square footage as part of your office.

Despite what the form says, you can also use any other “reasonable method” to compute the business use for your indirect business related expenses. The easiest method is to count the number of rooms in your house and divide the totals accordingly. If you have a total 10 rooms (we do not count in bedrooms for that purpose, but actual rooms), you can deduct 10% of your indirect expenses. But this calculation assumes your rooms are generally the same size. So if your 10×10 office is one of five rooms in your 3,000-square-foot house, deducting 20% for office use obviously won’t fly if you get audited. So, to be safe you should work with actual square footage numbers to be able to survive an audit.

Important to note: One limitation on home-office deductions is that these deducations cannot put your business in the red (meaning your business makes a loss for the tax year). But that doesn’t mean the deductions are fully wasted. Any amount that puts you below the break-even point gets carried over to the following tax year. And (!!) this limitation doesn’t apply to the partial mortgage interest and property taxes, which are generally fully deductible no matter how much money your business loses.

An important note on home-office deductions. To defend yourself in case of an audit, take pictures of your home office (with absolutely no personal items visible) to back up your claim that the space is used only for business. Keep the photos handy and eventually attach them to your very first tax return when you use it.

Starting a new small business from home? Smarttaxadvice.com recommends the First Plus Platinum Credit Card. This easy $7500 credit line is ideal for consumers with poor or no credit starrting a business. This Credit Card comes with 0% interest for the first year. No application fee. No credit checks. No deposits. We think this is a great way to pay for business expenses until your new small business has build up its own credit history. Check out this great small business credit card.

December 25, 2007 | Filed Under Tax Advice

Comments Off 

How the Home Equity Loan Interest Tax Deduction Works

One nice feature of home equity loans is that borrowers may get a tax deduction on interest paid for the loan. However, keep in mind that this kind of deduction requires careful planning and cannot be used unlimited.
 
Deducting Mortgage Interest
Tax payers can claim a tax deduction on interest paid on a loan secured by their first or second home. Nowadays most home equity loans actually fit this category, but borrowers can get confused if they have more than one “second” homes or mortgages. For example, you may use a home equity loan as part of a debt consolidation program. Suddenly, the interest you pay becomes tax deductible – not just an expense. The interest deduction from your home equity loan is not unlimited. You can generally deduct interest you pay on the first $100,000 of a home equity loan. After that, it depends. If the home equity loan was used to improve your first or second home – or to purchase a second home as an example – you can eventually take the deduction on the amount up to $1 million or the value of the home. Please refer to IRS Publication 936 Section 2 for more details. There are some gotchas if you file your taxes and need to pay AMT. As far as the alternative minimum tax (AMT) goes, your home equity loan deductions will only help you if you used the money for home improvements. Debt consolidation using your home will not work out as expected in that case.

One important thing to keep in mind is that if you use a home equity line of credit to consolidate your debt, make sure you apply the savings towards the loan principal. After all you are dealing with your house, the place where you live. You do not want to end up losing your house due to excessive spending on your credit cards for non-essential items.

Smarttaxadvice.com recommends the First Plus Platinum Credit Card. This easy $7500 credit line is ideal for consumers with poor or no credit. This Credit Card comes with 0% interest for the first year. No application fee. No credit checks. No deposits. Included in the card activation is a 30 day trial to ID Watchdog, a leader in identity theft protection. And best of all a new customer will also receive a FREE credit fraud protection and a consultation with an ID protection specialist! That is one of the best deals out there and can certainly help you through tax season if you are still suffering from high Christmas related credit card bills and are facing a possible tax penalty.

December 25, 2007 | Filed Under Tax Advice

Comments Off 

Review: TurboTax Deluxe - Federal + State 2007

Another tax preparation software review here at SmartTaxAdvice.com. This time we picked TurboTax Deluxe 2007 for Federal Returns made by Intuit. TurboTax Deluxe 2007  is the 2007 Edition of this well known tax software and can help you maximize your tax deductions with mortgage interest, donations, education expenses, and medical expenses - over 350 in all! In our review we did not go that far, but concentrated on an average tax return. We wanted to see if the tax software would live up to the high standards it has set in the past years. We were impressed with the 2007 Edition of TurboTax Deluxe and how it has evolved. TurboTax Deluxe 2007 guides you step-by-step through the process and asks you easy to understand questions in plain English. It then puts your answers on IRS- and state-approved forms on the screen (and of course in the final output). We found this a great option for those people who are not ready to trust the eFile option and still prefer to mail in a paper tax return. We printed the tax forms out and compared them to the ones you get directly from the IRS website – no difference and you will be very safe to use them to file your paper tax return and to eventually archive your return for future reference.

Here are some more highlights of our TurboTax Deluxe review.

TurboTax Tax Preparation SoftwareTurboTax Deluxe 2007 helps you handle changes in your life with the many events that can affect your taxes. I always found it confusing how some life changes affect your taxes abd TurboTax does a great job to address those concerns. The tax saver videos included in the tax preparation software are great in my opinion.

TurboTax Deluxe Federal + State 2007 guides you through your federal and state tax returns, with simple-to-understand questions to help you finish and file your federal and state taxes. You can Find over 350 tax deductions depending on your personal situation so that you can take advantage of getting credit for your donations as an example.

TurboTax includes a huge variety of tax forms. No need to search the confusing looking IRS website. Just open TurboTax and easily access any common tax form you might need to file your return. Here is an (incomplete) list of tax forms  included in TurboTax.

Form 1040 Individual Income Tax Return
Form 1040A Individual Income Short Form
Form 1040EZ Individual Income Tax Return EZ
Form 1040-V Payment Vouchers
Form 1040X Amended Individual Tax Return
Form 1099-DIV Dividend Income Worksheet
Form 1099-G Certain Government Payments
Form 1099-INT Interest Income Worksheet
Form 1099-MISC Miscellaneous Income Worksheet
Form 1099-MSA Medical Savings Account Distribution
Form 1099-OID Original Issue Discount
Form 1099-Q Qualified Education Program Payments
Form 1099-R Distributions from Retirement Plans Worksheet
Form 1116 Foreign Tax Credit
Form 1310 Stmt of Person Claiming Refund
Form 2106 Employee Business Expenses
Form 2120 Multiple Support Declaration
Form 2210 Underpayment of Estimated Tax
Form 2210AI Annualized Income
Form 2441 Child and Dependent Care Expenses
Plus tons more to get all of your taxes taken care of.

Reduce Your Risk of Audit. TurboTax Deluxe double-checks your return for accuracy and completeness and helps you fix any errors before the IRS spots them. I love seeing these guarantees, because it makes me trust the tax preparation software more. Being audited by the IRS sucks big time and I just can sleep better at night knowing that I can just hand off all my stuff to a TurboTax Professional and let them deal with the IRS.

Like TaxCut TurboTax comes with a large package of guarantees. As an example there are the 100% Accurate Calculations Guarantee, the Maximum Refund Guaranteed or Your Money Back, and the satisfaction guarantee. Purchases Made at a Retailer: Try TurboTax software. If you’re not satisfied with TurboTax software, return it within 60 days of purchase with your dated receipt for a full refund of the purchase price. These guarantees match the ones issues by other tax preparation software makes or even exceed them.

Conclusion: If you are familiar with TurboTax and used it the years before, you will just jump right and prepare your tax return easily. If you are new to TurboTax you will find a very easy to use tax software package that has almost eveyrthing you need. If you have a small business and want to use Turbo Tax to file your tax return you might want to look at the expanded features of TurboTax 2007 Home and Business. Anyway – TurboTax Deluxe is a great tax software to file your taxes yourself and to avoid the need to pay for a tax accountant. Two Thumbs up from SmartTaxAdvice.com

December 23, 2007 | Filed Under Tax Filing, Tax Preparation Software

Comments Off 

Next Page →