Working From Home: Taxes in the Home Office
Home Office
If you often or exclusively work from home, you have likely carved out a productive space for your work. Although there are some specific criteria you have to satisfy, you may be able to write off some of your operating expenses for that home office.
Here are a few things you should know:
Size doesn’t matter
There’s no size requirement. Your designated space can literally be a desk, or it can be an entire portion of your home. So long as the space is distinct, identifiable, and used exclusively for business.
Exclusive doesn’t mean completely exclusive
If you frequently work from the dining room table, or the couch from which you normally watch TV, you cannot claim that space for the deduction. The space you claim must be specifically used for business purposes.
Business storage and daycares have a different set of criteria
If you operate a daycare or use your home to store goods for your business, you can ignore the previous point. Storage space has to be used only for product that you intend to sell, and your home has to be the only “fixed location” of your business. So if you’re just storing some extra business equipment or stock, your home space doesn’t qualify.
Employees can also deduct home office expenses
You can only qualify for this deduction if the office exists for your employer’s convenience. An office remodel or lack of space at the usual office location would apply in this instance. However, if you’re renting out the space to your employer, you cannot claim the deduction.
If you work in multiple locations you can still claim the deduction
You can only claim the home office deduction if your home is where you do the majority of your work, or your home office is where you perform specific tasks that are a necessary function of your job. If you use a part of your home exclusively and regularly to meet with clients, customers, or patients, it does qualify for the deduction
Even if it is not your primary place of business, you can still claim the deduction. However, just because you take the occasional phone call or meeting in the space does not mean it qualifies; you have to be conducting regular in-person meetings. There’s also a partial deduction in the event that you only meet the criteria for part of the year.
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Moving On Up: Tips to Maximize Your Tax Credits
Moving Day
No one really likes moving: it’s costly, stressful, and generally a pain in the butt–and usually the lower back at the same time. But there’s a small light at the end of that tunnel: there are some tax benefits available to movers. Two things worth noting: the following presupposes that you’re moving for a new job; costs incurred for moving within the same town do not qualify for a deduction.
There are a few requirements which must be met:
Distance Requirements
The distance between your new job and your former home must be at least 50 miles farther than your previous employer is from that home. The IRS requires you to use the shortest commutable routes between two locations to judge this distance.
Time Requirements
You must work full-time for a minimum of 39 weeks during your initial 12 months, which starts on the day you arrive at your new location. If the 39 weeks are not consecutive you can still satisfy this requirement, whether it’s for one or multiple employers.
Okay, I Qualify: So What Is Deductible?
You may deduct any reasonable expense that you incur during the transport of your personal and household items to the new home.
This includes the cost of renting a storage unit (up to 30 days) if you are unable to immediately move your stuff into the new space. If you drive your personal vehicle, you are also able to include gas, oil, parking fees, and any road tolls. If you’re moving a long distance, you can deduct airfare, train tickets, or bus fare.
Claiming the Moving Expenses Deduction
Because of the required 12-month period, most taxpayers are unable to satisfy the time requirements until the following tax year. However, the IRS permits you to claim the deduction in the year you move. Should you not satisfy all requirements at the end of the 12-month period, you must reverse the deduction.
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Essential Facts About Taxes and Natural Disasters
Taxes and Natural Disasters
We extend our condolences to anyone who has experienced the wrath of a natural disaster. Although perhaps not quite a silver lining, it’s worth knowing that if you suffer damage to your home or personal property, you may be able to deduct losses based on the damage incurred during a disaster. Such disasters may include earthquakes, floods, hurricanes, and tornadoes, but can also include losses from accidents, fires, thefts and vandalism. The following rules apply to personal-use property; different rules apply to business or income property.
If your property is insured, you are required to file a timely claim for reimbursement. If you do not, you are unable to deduct the loss as a casualty. You are generally required to deduct a casualty loss the year it occurred. However if your loss was in a federally declared disaster area, you may have a choice when you deduct the loss, i.e. in the form of an amended tax return from the preceding year.
There are a few rules that must be applied to casualty losses:
$100 rule: once you have calculated your casualty loss on personal property, you must reduce that loss by $100. Apply this reduction to each casualty loss event during the year, regardless of how many pieces of property are involved in the loss.
10% rule: reduce the total of all your casualty losses on personal property for the year by 10% of your adjusted gross income.
You cannot claim casualty losses from normal wear and tear, including progressive deterioration or pest damage.
You are also not able to claim future losses for projected future profits.
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How Artists Can Benefit from a CPA
Freelance Artists
Freelancers tend to be busy in general, and freelance artists are perhaps even more busy than the average freelancer. When you’re a freelance artist, you’re simultaneously your own employee, manager, PR agency and HR representative. This means that you’re likely super busy. Because time is important to artists, organization is key and a good CPA can help you stay manage your affairs. Here’s a few specific benefits a CPA can bring to the table:
A CPA can help you make sense of your earnings and expenses: you’ve got clients, vendor fees, invoices, and supply costs to worry about. All of this is in addition to creating your art! Brutal! However, a CPA can help you put all of that in order to ensure that you claim appropriate deductions and credits, and pay the correct amount of taxes, which gives you fewer things to worry about.
Tax recommendations: you spend time performing, practicing, or creating, so you might not always be thinking about expense tracking. A good CPA can make recommendations on deductions and tax credits, which will help you know what expenses you should track for tax purposes. Doing so can help maximize your tax return, which in turn can give you more to reinvest into your art. Or use it to take some well-deserved time off.
They can free up your time so you can focus on your art: you’re busy maintaining all aspects of your business. Moreover, certain art mediums are not immediately replicable and serviceable as many hourly or salaried job tasks, meaning that artists tend to work odd, long, and inconsistent hours. Along with properly maintained records, a good CPA can help free up your time so you can focus on doing what you love.
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How to Be Organized for Tax Time as a Freelancer
Freelancer Issues
Freelancing can be simultaneously rewarding and stressful. Unlike most in-house jobs, which have an HR staff, a sales staff, and so on, freelancers often have to wear many professional hats. Accordingly, organization for freelancers is paramount, and here are a few tips to help freelancers stay as organized as possible when it comes time to file taxes.
Spreadsheets are your friend: you already know that it takes a lot of organization to be a freelance employee. Between dealing with clients, tracking expenses, filing invoices, and maintaining your professional and personal schedules, a good ol’ spreadsheet or expense tracking app is invaluable. Not only will your clients appreciate how organized you are, you’ll be thankful for it at tax time. Your CPA will thank you, too.
Make record-keeping a part of your regular to do list: although the automation features of many organization apps can decrease the time you will need to dedicate to staying organized, you will still need to set aside time to put your business in order. Making self-organization part of the regular routine will help make your business run more smoothly overall.
Find a good CPA: if you’re a solo freelancer, your time is valuable and you likely account for time more so than the average employee. A good CPA can not only crunch numbers for you at tax time, but can also make recommendations to help you maximize your return. A larger return allows you to reinvest in your business (or take a vacation), and the extra time frees you up to focus on your work. Or to take that vacation early.
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Is There Tax Relief for Disaster Victims?
There are multiple tax relief funds available for victims of disasters. In 2016, with the large number of floods, there are various states offering tax credits to those who incurred any physical damages to themselves or their assets as a consequence of these natural disasters.
Which Taxpayers Qualify
If an area qualifies for tax relief due to a disaster, a taxpayer doesn’t necessarily have to be in the federally declared disaster area in order to be considered for relief. The IRS bases their consideration on who was “affected” by the storm by looking at all records associated with the filing and payment deadline postponed during the relief period. People who are affected can be a business entity, sole proprietor, individual or a shareholder in an S corporation.
Search the IRS Website
The IRS posts all of their natural relief tax credits online. If a recent natural disaster occurred in your area and you were near a documented relief area, you may be qualified for a tax credit. Under law, the IRS usually posts all the requirements that need to be met when filing a disaster-related casualty loss on your tax returns.
If you were affected by a natural disaster, keep yourself update with the IRS website until you get your taxes back. Hiring a tax professional could help with providing all the necessary documents and filing of forms to get your taxes expedited back to you.
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How to Notify the IRS of an Address Change
If you are looking to update your address in the IRS records, there are several ways to go about doing this. All changes can take up to 4-to-6 weeks to process fully in the IRS system.
Address Change
- Electronic Notification
If you are looking to update your address because your refund check was sent back to the IRS, then an electronic notification can be sent to the IRS to help expedite the check back out to you. Using the “Where’s My Refund” website for the IRS, you can successfully change your address online. You will need to provide the following information: amount being refunded to you, social security number, and your filing status.
- Written Statement
If you want to send a written statement to the IRS notifying them of a change of address, you will need to provide the following information: social security number or individual taxpayer identification number or your employer identification number, your full name including middle and last name, old address on file and your new address. Send the statement to the same address used to file your last statement.
- Tax Return
If you haven’t filed your taxes yet, you don’t need to notify the IRS. Simply fill your address section with your new address and it’ll automatically update in the IRS’s system.
- IRS Form for Businesses
If your business has changed addresses, you can fill out the Form 8822-B on the IRS website. This can be mailed to your nearest IRS office.
Changing your address is not important unless you are actively engaged with the IRS (dealing with tax returns and funds for an active tax year).
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The Most Outrageous Excuses for Not Filing Taxes
So many people feel that they have a good excuse for not filing their taxes. However, the Internal Revenue Service (IRS) doesn’t feel the same way and considers it to be tax fraud. In fact, they prosecute up to 75% of all their tax fraud cases annually. So here are some excuses that you may feel are legitimate, but are really outrageous excuses to the IRS for not filing your taxes.
- You Think It’s Voluntary
Taxes are not voluntary. Many people believe that because the Form 1040 return states that the tax system is voluntary, it means they don’t have to file for federal taxes. The IRS says the voluntary status of it is from allowing taxpayers to determine and file their own taxes according to the forms without the IRS doing it manually. However, filing the actual forms is not voluntary.
- You Don’t Owe if You Don’t File
Just because you refuse to file, doesn’t mean you don’t owe the IRS. If you decide not to file, you could pay more in restitution fees and you’ll have a Tax Fraud on your permanent record.
- You Didn’t Receive a W2 Form
Some people don’t file because they can’t contact of their employer to send their W2. The IRS has procedures for people who can’t get a physical copy of their W2, so it’s no excuse to not file.
- You Believe the IRS Will File the Return
There’s a tax code that says the IRS is required to file returns for taxpayers who haven’t filed by a certain date. The IRS says it’s a flawed perception of the code that leaves people facing criminal and civil charges.
Don’t let yourself fall into believing any of these excuses. Failure to file your taxes, especially if you owe money, can lead to both civil and criminal penalties.
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What Happens if You File a False Tax Return?
Filing a false tax return leads to serious consequences and it’s something that is commonly caught by the IRS. When filing a fraudulent tax return, fines issued can extend up to $250,000 for individuals and up to $500,000 for a corporation. This can also be accompanied by a 3 year prison sentence if prosecuted as a high dollar tax fraud case.
Tax Fraud
One of two things will happen if you are facing suspicion of tax fraud. If the investigation is dealing with less than $100,000, the IRS will typically issue a letter in the mail and ask for repayment immediately. You can either oblige and pay the balance in full, setup a payment plan with the IRS, or simply ignore it.
Ignoring the letter will lead to the IRS initiating a formal investigation. Prosecution will then follow should the IRS find sufficient grounds to do so.
If the IRS finds tax fraud to be well over $100,000, the IRS will immediately issue a formal investigation and you will most likely be contacted by two IRS agents who will question you. It’s best to hold off on answering all questions and getting an attorney present immediately to finish the questioning with the IRS.
Let your attorney know if you were guilty of the tax fraud so they can work out a plea bargain with the IRS to minimize the prison sentence and associated fees. If you didn’t commit the crime, present all your documentation to your attorney so they can get your investigation situated in the court with relevant information and paperwork.
Be careful when dealing with falsified tax returns because the consequences can lead to a ruined reputation.
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Three of the Most Onerous Taxes
Tax rates across the board can fluctuate, making some taxes rather high. Although you may experience having to pay a lot of tax in one area, you may be able to offset that with credits, deductions, and reportable losses. It is important to know where your tax will be high and how to reduce your liability.
Estate Taxes
Estates are taxed at a rate of 40 percent. There is an exemption for larger, more valuable estates. If your estate is worth $5.45 million or more, it is reduced by $5.45 million to leave the remaining amount to be taxed at the 40 percent rate.
Lottery Winnings Taxes
If you take the lump sum after winning the lottery, you already pay a huge chunk of it to taxes, 39.6 percent. The kicker here is that 25 percent of your winnings is withheld by the government for tax purposes before distribution, leaving the rest taxable when you complete your return.
Moving to Higher Income Brackets
If you change jobs or have a significant increase in income, it can change your tax bracket. Top income earners can end up in the 35 percent tax bracket before credits and deductions. Deductions reduce your taxable income and credits reduce your taxes owed dollar-for-dollar.
Final Thoughts
It is important that you pay close attention to your finances and tax withholdings. If you make a mistake, it can cost you thousands of dollars. When the above situations become a factor for you, it is ideal to hire an accountant or tax preparation specialist to help find credits and deductions to reduce your tax liability.
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