Bunching strategy for “miscellaneous” deductions

Miscellaneous itemized deductions for any tax year are allowable only to the extent they exceed 2% of the taxpayer’s adjusted gross income (AGI). To the extent they don’t exceed 2%, the deductions are lost. Thus, it is very important to have proper planning to maximize your income tax deductions.


Most common miscellaneous itemized deductions are:

  • unreimbursed employee business expenses such as expenses for transportation and lodging while away from home, business meals and entertainment, continuing education courses, subscriptions to professional journals, union or professional dues, professional uniforms, job hunting, and the business use of the employee’s home;
  • investment advisory fees, subscriptions to investment advisory publications, certain attorneys’ fees, and the cost of safe deposit boxes; and
  • tax return preparation costs.

Classifying Miscellaneous Deductions

Taxpayers should try to bunch their miscellaneous itemized deductions in certain tax years to maximize the deductible excess over 2% of AGI. This can be accomplished by taking a number of actions before the end of 2015 such as extending subscriptions to professional journals, paying union or professional dues, enrolling in (and paying tuition for) job-related courses, etc.


Miscellaneous itemized deductions not allowed for alternative minimum tax (AMT)

To the extent that a deduction is barred under these rules, it is lost. There is no carryover. Miscellaneous itemized deductions aren’t allowed for alternative minimum tax (AMT) purposes. Consider the effect on AMT before accelerating these deductions.

The 2% floor isn’t an obstacle insofar as employee business expenses are concerned if the employer uses an expense allowance arrangement that qualifies as an “accountable plan.” Under such an arrangement, the employer’s reimbursement of employee business expenses is neither includible in the employee’s gross income nor deductible by the employee.

Determining Personal Use of Business Vehicle

What happens when the vehicle isn’t used solely for business use?

If an employer-provided vehicle is used for both business and personal use, the substantiated business use is not taxable to the employee however the personal use is considered a fringe benefit and taxable as wages.

There are a couple of options for the government and the employee in this situation. If the employee fully substantiates the business and personal use, the Government has the option to tax only the personal use of the vehicle, OR the employee has the option to reimburse the employer for personal use rather than having it treated as wages.

The Government also has the option to include all use as wages and notify the employee that they are reporting the full amount.  Then it is up to the employee to substantiate the business use and deduct it from their – personal tax return, form 1040 schedule A.


Vehicle is Listed Property

Keep in mind that vehicles are considered “listed property” and therefore, in order to support an exclusion from tax, separate records for business and personal mileage are required.

If records documenting business and personal mileage separately are not provided by the employee, the value of ALL use of the vehicle is considered wages to the employee.

In that case, the employee may be able to itemize deductions for any substantiated business use on their personal Form 1040, Schedule A. If an employee records business and personal use separately, only the personal use of the automobile is considered income.  This can have a significant impact on employees and is a sizeable incentive for employees to maintain the required documentation.


Commuting is not Valid Use of Vehicle

We have already discussed that commuting between the residence and work is considered personal use.  Vacation, weekend use AND use by a spouse or by dependents is also considered personal use.

An exception to personal use limitation is use that qualifies as de minimis.  A few examples of excludable de minimis use of an employer-provided vehicle include:

Small personal detours while on business, such as driving to lunch while out of the office on business OR Infrequent personal use.


Infrequent Personal Use of Vehicle

Infrequent personal use is generally less than one day per month.  This does not mean that an employee can receive excludable reimbursements for commuting 12 days a year.  Keep in mind that this rule is available to cover infrequent, occasional situations.

Let me give you an example to illustrate de minimis use.  Say an employee uses a government motor pool vehicle for a business meeting.  The government requires employees return motor pool vehicles at the end of the business day, but the employee is delayed and the motor pool is closed when the employee arrives back at the office.  The employee takes the vehicle home and returns it the next morning.

Assuming that this is an infrequent occurrence for that employee – generally happening no more than once a month, the commuting value of the trip is a nontaxable de minimis fringe benefit.

However, if this tends to be a frequent occurrence, the commuting is taxable to the employee.


 General valuation rule for fringe benefits

Under the general valuation rule for fringe benefits, the amount to include in income is the fair market value.

For vehicle use, fair market value is generally the lease value of the vehicle, which we will discuss in a minute, but other rules may apply in certain circumstances.

There are actually three methods that determine the personal use value of a vehicle.  They are:

  • The Automobile Lease Valuation Rule
  • The Vehicle Cents-Per-Mile Rule  AND
  • The Commuting Rule

When the employer reports personal use as wages, they must use one of these 3 special valuation rules.  Generally, these rules are applied on a vehicle-by-vehicle basis and the employer may use different rules for different vehicles and for different employees.

The first method, the Automobile Lease Valuation Method is calculated by:

  • First – Determine the fair market value of the vehicle on the first day it is available to the employee.  The employer’s cost, including tax, title, etc. may be used to determine theFMV.
  • Then – Use the table in either Reg. §1.61-21(d)(iii) or in Publication 15-B to compute the annual lease value.
  • Next – Multiply the annual lease value by the percentage of personal use computed by dividing the personal use mileage by the total miles driven.
  • And if fuel is provided, add 5 and a half cents for each mile driven for personal use.

Keep in mind that under this method, other expenses such as the maintenance and insurance costs are included in the rate and cannot be reimbursed separately.

To simplify bookkeeping somewhat, for government entities that have more than 20 vehicles used for business and personal use by employees, a “fleet-average value” may be used to calculate the annual lease valuation.

But, there is a criteria that may make this “Fleet-average” calculation difficult for many Government entities.  In 2013, each car must be valued at less than $21,200 to use the fleet –average value.  For trucks and vans, that amount is $22,300 per vehicle.


“Cents per Mile” rule

The second valuation method is the “Cents per Mile” rule.  To use the vehicle cents-per-mile rule, one of the following tests must be met:

  • The employer reasonably expects the vehicle to be regularly used in the trade or business throughout the calendar year, or
  • The mileage test is met.

So, looking at the first test, what is meant by “regularly used in the business” To determine this, one of 2 tests must be met.

  • First – At least 50 percent or more of the total annual mileage each year is used in the employer’s business, or Second – It is generally used each workday to transport at least three employees to and from work, in an employer sponsored commuting vehicle pool.

You meet the standard if the vehicle is:

  • Driven by employees at least 10,000 miles for both personal and business use per year; and
  • The vehicle is primarily used by employees

This method has some additional rules that the government must follow in order to use this method.  Once the government selects this method, they must continue using the cents-per-mile rule for the vehicle for all later years, unless the employer can use the commuting rule for any year during which use of the vehicle qualifies under that rule.


Commuting Valuation Method

The third method is the Commuting Valuation Method.  This method, as the name implies, values the personal use of commuting at a fixed amount per commute for each employee.

The rate per commute is currently set at one dollar and fifty cents each way. Keep in mind that this is a per trip, per person calculation.

So if you have an employee that commutes twice to and from work on the same day it would be calculated as 4 commuting trips at one dollar and fifty cents per trip or six dollars for that day.

If that vehicle had 2 employees commuting twice that day, it would be taxable to both employees at the $6.00 for that day.

In order to use this method, ALL of the following conditions must be met:

  • First, the vehicle must be owned or leased by the government;
  • the vehicle is provided to the employee for use in performing duties for the government;
  • The government requires the employee to commute in the vehicle for a valid non-compensatory business reason;
  • The government must also have a written policy prohibiting personal use other than commuting;
  • In addition, the government must oversee that the employee does not actually use the vehicle for any personal use other than de minimis personal use;
  • And last, the employee who uses the vehicle can not be a control employee which we will discuss in a minute.

Keep in mind that for this method, the employer –requires the employee to use the vehicle for a business purposes; it cannot be voluntary on the employee’s part.

An example of this would be, the government  has an employee, who is on call 24 hours a day to respond to road emergencies, and he is required by his employer to commute in a vehicle outfitted with communications or other equipment the employee would need if called out at night. This would fulfill the requirement that the employee is required by the employer to commute in a government vehicle.



Taxable Income, Tax Brackets, Marginal Tax Rates

The biggest point of confusion for a tax novice is how the tax brackets affect their tax burden. Your marginal tax rate and your effective tax rate are not the same thing. Moving into a higher marginal tax bracket does not mean your entire income is taxed at that rate.


Marginal Tax Brackets for 2014

The marginal tax brackets for 2013 are listed here (2014). I will use the single filing brackets for illustrative purposes (I also didn’t include deductions for this initial example).

Say you’re a single filer that has $34,000 in taxable income (taxable income is explained more in-depth later). Your boss calls you in and tells you that you’re getting a raise to $40,000 per year! Great! But… how does this affect your taxes? At $34k you’re just under the cutoff for the 25% tax bracket, and now your marginal tax rate is 25% after the raise. Are you really “making” more money, but losing virtually all of it to the increased tax burden?


What are the marginal tax brackets for 2014

No. Since the tax brackets are marginal, based on the marginal tax rate (the tax rate at which the next dollar you earn is taxed), only the amount above the 25% bracket threshold ($36,901) is taxed at 25%. Your tax calculation looks like this:

  • $8,925 at 10% = $892.50 ($8,925 in taxable income)
  • $27,325 at 15% = $4098.75 ($36,250 – $8,925 in taxable income)
  • $3,750 at 25% = $937.50 ($40,000 – $36,250 in taxable income)
  • Total tax = $5,928.75, effective federal rate = 14.8%

The marginal tax rates only apply to taxable income – that is, your income after all of your deductions and exemptions are factored into your total income. Your total income is listed in line 22 of the 1040 form, while your taxable income is listed in line 43 of the 1040.


Deductions: Standard, Itemized, above the line

Everyone is entitled to deduct certain things from their taxes. Deductions reduce the amount of income that is subject to tax – they reduce your taxable income. Deductions fall into three major categories: the standard deduction, itemized deductions, and “above the line” deductions.

  • The standard deduction in 2013 is $6,100 for single filers in tax year 2013 ($6,200 for 2014). If you claim the standard deduction, this is what you’d put in line 40 of Form 1040.
  • If you want to claim itemized deductions, of which a number of expenses qualify, you need to include Schedule A with your tax filing. The total of your itemized deductions goes in line 40 of the 1040 form. The major itemized deductions are for home mortgage interest, state/local/property taxes, and charitable donations.
  • “Above the line” deductions are listed in lines 23-35 of the 1040. Most require additional documentation to show eligibility. In/r/personalfinance the most popular tend to be the student loan interest deduction (line 33) and the IRA deduction (line 32).

One of the most common tax questions we get here is “Should I itemize my deductions or just take the standard deduction?” If the sum of your itemized deductions is not larger than the standard deduction, you’re almost always better off claiming the standard deduction.


Taking the Standard Deduction

Now let’s go back to our simple example from before. Taking into account the standard deduction and one personal exemption for a single filer, the tax calculation changes significantly for the better:

  • $6,100 + $3,900 = $10,000 subtracted from your taxable income.
  • $8,925 at 10% = $892.50 ($8,925 in taxable income)
  • $21,075 at 15% = $3,161.25 ($30,000 – $8,925 in taxable income)
  • Total tax = $4,053.75, effective federal rate = 10.1%

Notice that the standard deduction and personal exemption put you in the 15% marginal tax bracket instead of the 25% bracket.

Your state may offer its own tax deductions for state taxes. Details vary by state, but one of the most valuable is the deduction for 529 plan contributions if your state offers it.

2015 Student Loan Tax Deduction

A common question for 2015 tax is, can I claim a deduction for paying down my student loan? Absolutely yes!  Make sure you claim your student loan interest payment deductions on your tax return. This can be a very valuable tax break and the net effect is reducing the interest that is paid on student loans.  Taxpayers who owe student loans could actually see a significant amount of money deducted from taxes owed by repaying your student loans.


2015 Student Loan Interest Deduction

When filing 2014 taxes, keep an eye out for the Form 1098-E for tax year 2014. This form from your student loan lender will let you know how much interest you’ve paid on interest in student loans. You will use this Form 1098-E to determine how much you can deduct when you file your taxes (up to $2,500 for single filers). You can deduct up to $2,500 in interest paid on a qualifying student loan.

However, not everyone will be able to deduct their student loan interest on their tax returns. The student loan interest deduction begins to phase out if your adjusted gross income (AGI) is:

  • $65,000 if filing single, head of household, or qualifying widow(er)
  • $130,000 if married filing jointly

The deduction is completely phased out if your AGI is:

  • $80,000 if filing single, head of household, or qualifying widow(er)
  • $160,000 if married filing jointly


Modified adjusted gross income and Student Loan Deduction

Modified adjusted gross income for the purpose of calculating the student loan interest deduction means adjusted gross income without taking into account any deductions for student loan interest, for tuition and fees, or for domestic production activity; and by adding back any of the following exclusions: the foreign earned income exclusion, the foreign housing exclusion, the foreign housing deduction, and the income exclusions for residents of American Samoa or Puerto Rico.

If you didn’t get a Form 1098-E from your student loan lender, it might mean you paid $600 or less in interest in the past year . You can still claim the student loan interest deduction by putting the amount of interest you paid on your student loans onto your tax return.


Income Based Repayment or Income Contingent Repayment Deductions

You can take certain other deductions while on a Income Based Repayment or Income Contingent Repayment plan. you can still take the interest deduction mentioned above, too. According to IRS law, you’re allowed to deduct interest that you paid on qualified student loans regardless of your repayment plan. However, if the federal government ends up forgiving some of your student loan debt due to Federal Student Loan Forgiveness Programs in the future, you’ll have to pay taxes on any amount that is forgiven. This is the tax hit that can occur much farther down the road that student loan borrowers


Reference Material Relating to the Student Loan Interest Deduction



Calculating Capital Gains and Deducting Capital Losses

Planning for capital gains and deducting capital losses is a way to increase your long-term investment return. However, to calculate capital gains and understand capital losses correctly, taxpayers must understand several different tax laws. Taxes are often overlooked, but are a vital component of long term investment returns.


Offsetting Capital Gains with Capital Loss

The basic offsetting rule is pretty simple: Long-term capital losses offset long-term capital gains before they offset short-term capital gains. Similarly, short-term capital losses offset short-term capital gains before they offset long-term capital gains. One part of the rule is that you may use up to $3,000 of total capital losses in excess of total capital gains as a deduction against ordinary income in computing your adjusted gross income or AGI. This can be a great benefit for people in any income tax bracket. It will provide an immediate tax savings and realizing capital losses is quite easy.


Offsetting Capital Gains Rules

  • long-term gain with short-term gain
  • long-term loss with short-term gain
  • long-term gain with short-term loss
  • long-term loss with short-term loss

Individuals are subject to tax at a rate as high as 39.6% on short-term capital gains and ordinary income. The same rate as ordinary income will be used on short-term capital gains.


Long-term Capital Gains Rates

For most individuals long-term capital gains on most types of investment assets are taxed at a maximum rate of 15%. However, that 15% rate is

  • zero % to the extent the gain would otherwise be taxed at a rate below 25% if it were ordinary income and
  • 20% to the extent that the gain would be taxed at a 39.6% rate if it were ordinary income.

Taxpayers should try to avoid having long-term capital losses offset long-term capital gains since those losses will be more valuable if they are used to offset short-term capital gains or up to $3,000 per year of ordinary income. Make sure that the long-term capital losses are not taken in the same year as the long-term capital gains are taken.Remember to think about investment considerations before tax. It might not always make sense to do what is best tax wise that might lead to disastrous investment results.


Realizing Capital Losses (Tax Harvesting)

To the extent that taking long-term capital losses in a different year than long-term capital gains is consistent with good investment planning, you should take steps to prevent those losses from offsetting those gains. If you have yet to realize net capital losses for 2014, but expect to realize net capital losses in 2015 well in excess of the $3,000 ceiling, you should consider shifting some of the excess losses into 2014. That way the losses can offset 2014 gains and up to $3,000 of any excess loss will become deductible against ordinary income in 2014 The big hurdle is Internal Revenue Code Section 1211, which caps the deduction at $3,000 for both married couples and single filers. (Married couples who file separate returns are limited to a maximum deduction of $1,500 per person.)


Using Wash Sale Rule

Paper losses or gains on stocks may be worth recognizing this year in some situations. But suppose the stock is also an attractive investment worth holding for the long term. There is no way to precisely preserve a stock investment position while at the same time gaining the benefit of the tax loss, because the so-called “wash sale” rule precludes recognition of loss where substantially identical securities are bought and sold within a 61-day period (30 days before or 30 days after the date of sale). Thus, you can’t sell stock to establish a tax loss and simply buy it back the next day.

How to Avoid the Wash Sale Rule

However, you can substantially preserve an investment position while realizing a tax loss by using one of these techniques:

  1. Sell the original holding and then buy the same securities at least 31 days later. The risk is upward price movement.
  2. Buy more of the same stocks or bonds, then sell the original holding at least 31 days later. The risk here is downward price movement.
  3. Sell the original holding and buy similar securities in different companies in the same line of business. This approach trades on the prospects of the industry as a whole, rather than the particular stock held.

For mutual fund shares or ETFs, sell the original holding and buy shares in another mutual fund that uses a similar investment strategy.

Understanding Tax Exemptions and Dependents for Tax Purposes

Almost everyone can claim an exemption on your tax return. This usually reduces your taxable income and is one of the easiest “tax breaks” that are available to most people. In most cases reduces the amount of tax you owe for the year. Tax exemptions and dependents are closely related. It is essential to understand dependents in order to claim tax exemptions. Here are 10 facts tax exemptions to help you file your tax return in 2015.


Information about Tax Exemptions and Dependents

  1. E-file your tax return. Electronic filing is the easiest way to file a complete and accurate tax. The software used for e-file will help you determine the number of exemptions you can claim based on your dependents.There are many different e-file options available for taxpayers.
  2. Exemptions reduce income. There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. Generally, you can deduct $ 3,950 for each exemption you claim on your tax return for 2014.
  3. Personal exemptions.   Generally, you can claim an exemption for yourself. If you are married and file a joint return, you can claim your spouse as well. If you file a separate return, you can claim an exemption for your spouse if your spouse:
    • had no income,
    • It is not providing one tax return and
    • was not dependent of another taxpayer.
  1. Exemptions for dependents.   Normally you can claim an exemption for each of your dependents. A dependent is your child or relative who meets a series of tests. You can not claim your spouse as a dependent. You must include the social security number of each dependent you claim on your tax return. For more information about these rules, see Publication 501 , Exemptions, Standard Deduction, and Filing Information.
  2. Report your health coverage. The Health Care Act Affordable required to report certain information about your health insurance . The individual mandate requires that you and each member of your family:
    • have a qualified health insurance, called minimum essential coverage
    • have an exemption from this requirement coverage or
    • have a shared responsibility payment when you file your 2014 tax return.Visit IRS.gov/ACA for more information on these rules.
  1. Some people do not qualify. Normally, you can not claim your spouse as dependent if married persons filing jointly with your spouse. There are some exceptions to this rule.
  2. Dependents may have to file.   A person claiming as a dependent may have to file your own tax return. This depends on such factors as the amount of your income, whether you are married or should certain taxes.
  3. Dependent can not claim exemptions in their statements. If you can claim a person as a dependent, that person may not claim a personal exemption on your own tax return. This is true even if you do not claim that person on your tax return. This rule applies because you can claim that person as a dependent.
  4. Removal of exemption. The $ 3,950 Per exemption is subject to income limits. This rule can reduce or eliminate the amount you can claim based on the amount of their income. See Publication 501 for details.
  5. Try this tool IRS online. Use the interactive tool assistant taxes  on IRS.gov to verify whether a person qualifies as your dependent.

Advice on Year-End Charitable Contributions to Qualified Charities

Every year during the holiday season many people donate to charities for more reasons than a tax deduction. However, remember, if you want to claim a tax deduction for donations must itemize your deductions when you file taxes for the tax year.. There are several tax rules you need to know before making a donation. Here are six tips from the IRS that should help people make best use of their contributions to charities.


Qualified organizations eligible for deductions

Qualified organizations eligible for deductions. You can only deduct donations on your tax return made ​​to qualified charities. Use the tool IRS Select Check to see if the group you are making the donation to qualifies as a qualified charity. You may deduct donations made ​​to churches, synagogues, temples, mosques and government agencies.


Monetary donations to charity

Monetary donations to charity. Monetary donations include those made ​​by cash or check, electronic funds transfer, credit cards and payroll deduction that get sent to a charity. You must have a bank record or written proof of the charity  to deduct any donation on your taxes. The receipt from the financial institution must show the name of the organization and the date and amount of the contribution. Bank records include canceled checks or statements of cooperative credit banks and credit cards. If you contribute through payroll deduction, taxpayers should always maintain a pay stub, W-2 forms or other documentation from the employer employer to prove their charitable deduction. This information should always show the total amount retained as a donation, along with the pledge card showing the name of charity.


Household goods donate to charity

Household goods donate to charity. Items include household furniture, household items, electronics, appliances and linens are often donated to charities. If you donate clothing and household items to charity generally must be at least used and in good condition in order to claim a tax deduction. If you claim a deduction of more than $ 500 for an item does not have to meet this requirement by including a qualified receipt with your tax return filing.


Required records

Required records. You should get a receipt from the organization for every qualifying deduction (either money or property) of $ 250 or more. Additional rules apply to the declaration for donations of that amount. This statement is in addition to the records necessary to deduct cash donations. However, a statement with all required information could meet both requirements to claim the charitable deduction.


New Year gifts.

New Year gifts.  You can deduct contributions in the year makes. If you upload your donation to a credit card before the end of this year, will count for 2014. This is the case but not pay the statement until 2015. A check will also feature 2014 provided it is mailed in 2014.

Advice on Year-End Charitable Contributions to Qualified Charities

Special rules.   Special rules apply if you donate a car, boat or plane to a charity.

The IRS requires that contributions of $250 or more must be substantiated in order to be deductible. The burden is placed on you, as the donor, to request written substantiation because a canceled check may not be sufficient to support a deduction. The amount of the contribution is fully deductible whether it is paid by cash, check or credit card. However, a charitable deduction cannot be based on a mere pledge to pay. The pledge must actually be paid before the end of the year in which the deduction is claimed.


Additional Resources from the IRS on Charitable Deductions:


Deduction for qualified long-term care services and insurance

There can be tax-relief, particularly tax deductions, associated with nursing home care and insurance. Both the cost of qualified long-term care and insurance coverage for such care qualify as deductible medical expenses.


Deduction for qualified long-term care services and insurance

Taxpayers themselves or people who have qualified dependents in nursing home care may be eligible for these special tax deductions. For individuals, the IRS considers tax-qualified long-term care premiums a medical expense. To what degree that will save you money on your taxes largely depends on your age and how you make a living.


What are Deductible Qualified long-term care services?

“Qualified long-term care” services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal-care services required by a chronically ill individual. The services must be provided under a plan of care presented by a licensed health care practitioner. To qualify as chronically ill, an individual must be certified by a physician or other licensed health-care practitioner (e.g., nurse, social worker, etc.) as unable to perform, without substantial assistance, at least two activities of daily living for at least 90 days due to a loss of functional capacity, or as requiring substantial supervision for protection due to severe cognitive impairment (memory loss, disorientation, etc.).


What is Deductible Qualified long-term care insurance?

“Qualified long-term care insurance” is insurance that covers only qualified long-term care services, doesn’t pay costs that are covered by Medicare, is guaranteed renewable, and doesn’t have a cash surrender value. A policy isn’t disqualified merely because it pays benefits on a per diem or other periodic basis without regard to expenses incurred. For 2013, long-term care insurance premiums are deductible up to the following limits: $360 per year for individuals 40 years old or younger; $680 over 40 to 50; $1,360 over 50 to 60; $3,640 over 60 to 70; and $4,550 over 70. Thus, for 2013, a married couple filing jointly, each of whom is over 70, can deduct up to $9,100 a year in premiums.


Dependency Test for Medical Expense Deduction

For purposes of the medical expense deduction, the dependency test will generally be met if you provide over 50% of the support of your parent or grandparent, including medical costs. You may not be able to claim a dependency exemption if the parent or grandparent has gross income above $3,900 in 2013 ($3,800 in 2012) or is filing a joint return, but you will still be able to include the medical costs with your own.

Home Office Expenses Deduction IRS Rules

Self-employed taxpayers who work from their homes may be entitled to favorable “home office” deductions for certain expenses they incurred. However, in order to claim this deduction, certain home office expense deduction rules must be met. When self-employed people make any kind of deduction from their taxes, the IRS is watching carefully and may always audit these deductions. An IRS audit for an improper home office deductions could lead to IRS penalties. If claiming these home office tax deductions, be sure to follow the rules very closely.

Home Office Expenses Deduction IRS Rules

The home office deduction is available for home owners and renters, and applies to all types of homes. IRS also provides for a simplified method to figure your expenses for business use of your home. The standard method has some calculations, allocations, and substantiation requirements that are complex and burdensome for small business owners.This new simplified option can significantly reduce recordkeeping burdens by allowing the qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.

How to Keep Home Office Business Deductions

Regardless of the method chosen, there are two basic requirements for your home to qualify as a deduction. One, you must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room. Two, you must show that you use your home as your principal place of business.


Home Office Expense Deductions Allowed

  • Deductions for the “direct expenses” of the home office. These are expenses that are easily traceable to the actual home office. For example painting the home office or buying furniture for the home office.
  • Deductions for the “indirect” expenses of maintaining the home office-e.g., the properly allocable share of utility costs, depreciation, insurance, etc., for your home, as well as an allocable share of mortgage interest, real estate taxes, and casualty losses.

In addition to these deductions, if your home office is your “principal place of business,”  the costs of travelling between your home office and other work locations in that business are deductible transportation expenses, rather than nondeductible commuting costs. Furthermore, you may also deduct the cost of computers and related equipment that you use in the home office.


Tests for home office deductions.

You may deduct your home office expenses if you meet the principal place of business test, the place for meeting patients, clients or customers test, or the separate structure test.

  • Principal place of business. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, as your principal place of business. Your home office is your principal place of business if it satisfies either a “management or administrative activities” test, or a “relative importance” test. You satisfy the management or administrative activities test if you use your home office for administrative or management activities of your business, and if you meet certain other requirements. You meet the relative importance test if your home office is the most important place where you conduct your business, in comparison with all the other locations where you conduct that business.
  • Home office used for meeting patients, clients, or customers. You’re entitled to home office deductions if you use your home office, exclusively and on a regular basis, to meet or deal with patients, clients, or customers. The patients, clients or customers must be physically present in the home office.
  • Separate structures. You’re entitled to home office deductions for a home office, used exclusively and on a regular basis for business, that’s located in a separate unattached structure on the same property as your home-for example, an unattached garage, artist’s studio, workshop, or office building.
  • Space for storing inventory or product samples. If you’re in the business of selling products at retail or wholesale, and if your home is your sole fixed business location, you can deduct home expenses allocable to space that you use regularly (but not necessarily exclusively) to store inventory or product samples.


More Information About Home Office Deductions

 If you conduct business at a location outside your home but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction. Generally, deductions for a home office are based on the percentage of your home devoted to business use. So if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities. If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. You must meet the two tests already discussed, plus your business use must be for the convenience of your employer, and you must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer. If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

How to Take Home Office Expense Deduction from IRS

For a full explanation of tax deductions for your home office, refer to Publication 587, Business Use of Your Home.


Deducting Union Dues on Tax Return

Is it possible to deduct union dues on a tax return?

Members of unions commonly ask if it is possible to deduct union dues on their tax returns. The IRS allows members of a labor union to deduct union dues on their tax returns. However, the first thing to keep in mind is that in order to deduct union dues, you must elect to itemize deductions on Schedule A instead of claiming the standard deduction for your filing status.


Deducting Union Dues on Tax Return

Most union members pay their dues through a system traditionally called check-off, in which the employer deducts the dues from members’ wages and gives them to the union. When dues check-off is not a provision of the union contract, members pay their dues and other fees directly to the union. Regardless of how union dues are paid, and regardless of whether the work site is in a right-to-work state or not, the dues, as well as initiation fees, are deductible from the union member’s annual income taxes.


Deducting Union Dues as Unreimbursed Employee Expenses

Again, you can deduct dues and initiation fees you pay for union membership. These are entered as unreimbursed employee expenses on Line 21 of Schedule A (Form 1040) Itemized Deductions. Find your annual union dues payment amount either from the W-2 form your employer sends you, the last pay stub of the year, which will show the year-to-date amount or your own checkbook. Enter this on line 3 of Form 2106, Employee Business Expenses. Use this form to list other unreimbursed business expenses and complete it, transferring the amount on line 10 to line 21 of Schedule A.


Deduct assessments or benefit payments to unemployed union members.

You can also deduct assessments or benefit payments to unemployed union members. However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions.

Deducting Lobbying Expenses

You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. See Lobbying Expenses under Nondeductible Expenses, later. Lastly, it is advisable to first determine if a taxpayer is better of deducting union dues by electing to itemize their deduction or by just claiming the standard deduction.