Site Updated for 2013
Starting in 2013, if you operate a business and use space in your home as a home office, you may now use a simpled method for claiming the home office deduction.
Under the new simplified method the maximum deduction is $1,500 per year and is based on $5 a square foot for up to 300 square feet. The IRS says, using the new simplified method will "reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually."
According to the IRS, in tax year 2011, the most recent year for which figures are available, some 3.3 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction) totaling nearly $10 billion.
Normally, home-based businesses are required to fill out Form 9929, a 43-line form form with complex expense allocation calculations, depreciation and carryovers of unused deductions. Under the new simplified method, taxpayers need only complete a short worksheet in the tax instructions and enter the result on their return.
Self-employed individuals claim the home office deduction on Schedule C Line 30, farmers claim it on Schedule F Line 32 and eligible employees claim it on Schedule A Line 21.
Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.
Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees, are still fully deductible.
The rules for claiming the home office deduction have not changed. You must use the space in your home regularly and exclusively for your business (no letting the kids play video games on your computer in your home office). The space in your home will qualify for the deduction even if you use it to perform administrate activities, such as bookkeeping, calling clients, scheduling appointment, preparing financial reports for your business, etc.
1: Seven states do not have a personal income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). But did you know there are two states that don't tax wages?
New Hampshire and Tennessee do not tax wages. They tax investment income from stocks and bonds.
2. Did you know the IRS is sitting on almost $1 billion in unclaimed income tax refunds?
The main reason for this is, about 1 million taxpayers nationwide simply don't bother to file a tax return. The is especially true for lower income taxpayers who have had income taxes withheld but don't realize they're entitled to a refund.
Another reason is bad addresses. Refund checks sent out by the IRS are being returned because the taxpayer moved but didn't let the IRS know about it ( a good reason for using direct deposit).
If you didn't file a return for 2011, you only have until April 15, 2014 to claim your refund. The IRS only gives you three years after the due date of the return to claim a refund. After that, you're out of luck and Uncle Sam gets to keep your money.
3. Did you know the IRS uses occupational codes to measure typical amounts of travel by profession, and a tax return showing 20 percent or more above the norm might get a second look? Here are a few other red flags that can trigger an IRS audit.
4. Did you rob a bank last year?
Silly as it may seem, if you did, you had taxable income! The IRS could care less how we "earn" our loot as long as they get their share of the take, from a tax compliance standpoint of course. So, if you're selling drugs or scamming investors and not reporting the income, some day you could find yourself in the same predicament as Al Capone! Here are some of the top tax myths.
The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan on Form W-2, Box 12, with Code DD. This is for information purposes only. The amount reported in Box 12 for health care coverage is not taxable.
Several important tax changes went into affect in 2013. Depending on your income, age, marital status, or whether you operate a business, you could be affected.
For example, higher income taxpayers will be impacted by the new top tax bracket of 39.6% and the two additional Medicare taxes, 0.9% and 3.8%.
Taxpayers under age 65 will have a tougher time deducting medical expenses because the floor for deducting medical expenses was increased to 10% from 7.5%.
The 2013 social security wage base is $113,700. It will be increased to $117,000 in 2014. For 2013 and 2014, the self-employment tax rate is 15.3% (social security rate 12.4% plus Medicare tax rate of 2.9%).
For 2013, the social security rate for employees and employers is 6.2% each and the Medicare tax rate is 1.45% each. No change in 2014.
If keeping records of meal expenses while traveling away from home on business is difficult for you, you can claim the IRS meal allowance.
The IRS meal allowance shown in the General Services Administration (GSA) tables is referred to as the M&IE rate (meals and incidental expenses). The table lists six tiers for the lower 48 continental United States ranging from $46 to $71.
The rates are broken down by category: breakfast, lunch, dinner, and incidentals (i.e. fees and tips for various services).
If you need to deduct a meal amount, first determine the location where you will be working while on official travel. Next, look up location-specific information at www.gsa.gov/perdiem. The M&IE rate for your location will be one of the six tiers listed on this table.
Self-employed individuals may claim the M&IE allowance. Employees who have expenses that are not reimbursed under an "accountable" plan may also claim the M&IE allowance.
To be tax-deductible, clothing and household items donated to charity generally must be in good used condition or better.
A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with the return.
Donors must get a written acknowledgement from the charity for each gift worth $250 or more that includes a description of the items contributed. Household items include furniture, furnishings, electronics, appliances and linens.
To deduct cash donations, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution.
Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.
Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction.
For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
The taxpayer must obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more.
Tax-Free Charitable Distributions for IRA Owners 70 1/2 or older
An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 to an eligible charity and can use the excluded amount to satisfy any required minimum distributions that you must otherwise receive from your IRAs in 2013. This option, which is scheduled to expire at the end of 2013, was first available in 2006.
The funds must be transferred directly by the IRA trustee to the eligible charity. Distributed amounts may be excluded from the IRA owner’s income, which lowers taxable income and avoids taxes on the distribution
If the IRA owner excludes the distribution from income, no deduction, such as a charitable contribution deduction on Schedule A, may be taken for the distributed amount.
Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.
Unless Congress acts, the first-year expensing limit for qualified business property is scheduled to fall to $25,000 in 2014. The expensing limit for 2013 is $500,000. That's a 95% reduction!
In addition, the phaseout threshold for 2014 is scheduled to fall to $200,000. The threshold for 2013 is $2,000,000. That's a 90% reduction.
Bonus depreciation is scheduled to expire at the end of 2013.
If you made contributions to a retirement plan, including a traditional IRA or Roth IRA, you may be able to claim the retirement savings contribution credit, (referred to as the saver's credit) on your 2013 return.
The maximum tax credit is $1,000 ($2,000 if married filing jointly). The deadline for setting up a new IRA or adding money to an existing one is April 15, 2014. Elective deferrals (contributions) must be made by the end of the year.
The IRS has posted important dates for December 2013 and January 2014 related to retirement plans administered by employers, trustees, and custodians.
The Internal Revenue Service recently announced that interest rates for overpayments and underpayments will remain the same for the calendar quarter beginning Jan. 1, 2014. The rates will be:
The IRS plans to increase fees charged for Installment Payment Agreements and Offers in Compromise effective January 1, 2014.
For more information on IRS Installment Payment Agreements and Offers in Compromise visit IRS.gov.
To apply for an IRS installment agreement online, use the Online Payment Agreement application.
To find out if you are eligible for an Offer in Compromise and what a reasonably acceptable offer amount might be, use the IRS Offer in Compromise Pre-Qualifier Tool.
John Koskinen, President Obama's nominee to head the IRS, was confirmed by a Senate vote of 59 to 36 December 20, 2013. Koskinen succeeds acting commissioner Daniel Werfel.
Beginning January 1, 2014, the standard mileage rate for a car, van, pickup or panel truck, will be reduced to 56 cents per mile for business miles driven during 2014. The rate for 2013 is 56.5 cents per mile.
Medical and moving related miles will also be decreased 1/2 cent to 23.5 cents per mile. The 2013 rate is 24 cents per mile for medical and moving miles.
The 2014 rate for charitable-related miles is 14 cents per mile. This rate is based on statute and hasn't changed for several years.
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