Ask a financial planner whether to save for retirement using a Traditional IRA or a Roth IRA and you may receive an unsatisfying answer: it depends. While the Roth IRA is a much-loved planning tool, whether it’s the best option for you will depend on several factors, but math is not one of them. Continue reading
Over 25 Million Americans work from home, but only 3.4 Million claim the home office deduction. Whether you’re a homeowner or a home-renter, if you work at home or use your home for business at all, you may be eligible to claim a home-office deduction this tax season.
There are some new home-office deduction rules that apply. But before we dive into those, let’s go over the requirements for claiming the tax deduction.
If you use your home for business, in order to claim a home-office deduction, the home–office:
1. Has to be used regularly and exclusively for business
2. Has to be your principal place for business
What do these two requirements mean?
1. Has to be used regularly and exclusively for business. You must use the area on a regular basis as your place for doing business and the area must be used exclusively for that business. It doesn’t need to be an entire room, but it does need to be an area that has clear boundaries (for example, the desk set-up in the corner of a room). Merely working at your kitchen table filing paperwork because you couldn’t get all your work finished in the office does not qualify.
2. Has to be your principal place for business. The rule of thumb here is that no substantial portion of your business is carried out in another fixed location (i.e. office). If you’re having face-to-face meetings at home or use it for the administrative portion of your business, even if you carry out business elsewhere, you can still qualify for the deduction for that room that is regularly and exclusively for business (for example with a carpenter or an interior designer who spends most of their time in other people’s homes).
- If you have a separate, freestanding building – a studio, barn, garage behind your house, that too, can qualify.
- For Freelancers: You may have a full-time job at an office, but freelance on the side (writer, blogger, entrepreneur). Good news: you can still qualify for their business as long as it is regularly and exclusively for business and used as your principal place of that business.
- If you are an employee and you use part of your home for business, you also may qualify for a deduction, but, in addition to the two tests above, you also have to prove that: 1) it is for the convenience of the employer (there are no hard and fast rules for that) and 2) you must not rent any part of your home to the employer and use the rented portion to perform services as an employee for that employer
There are 2 methods for calculating the home-office deduction.
1. Simplified method. Effective, January 1, 2013, this is a new simplified option (outlined methodology in detail in IRS Revenue procedure 2013-13) which significantly reduces the record keeping burden by allowing you to multiply a proscribed rate by a percentage of square footage used by the home-office. The proscribed rate is $5 per square foot for a maximum of 300 square feet or $1500 dollar of tax savings.
2. Regular method. This method has been around for many years, whereby you must determine the actual expenses for your home office. The expenses that can be allocated towards home office use can include things such as insurance, light, heat, power, repairs, depreciation, real estate taxes, and mortgage interest.
We suggesting calculating both ways to see which method will result in a bigger deduction.
For more information, call us.
Tax Audit. Just saying the words is enough to make most people cringe. With the April 15th tax-filing deadline rapidly approaching, we’re going to discuss the red flags that could trigger a tax audit.
Sometimes audits are chosen as part of a random sample. The rest of the time, there are a number of things you can avoid doing so as not to raise red flags. In order to avoid the likelihood of a government audit, follow these guidelines:
- Report all of your income. Make sure to file any 1099s received (from brokerage houses, miscellaneous income). The government conducts a matching audit from the payers with what you report: discrepancies are a red flag that will trigger an audit.
- A major red flag is if your business (owned) has had a loss for more than 2 out of 5 years. A business must satisfy rule of profitability (3 of 5 years) to avoid being considered a hobby (in which your profit motives are called into question).
- Avoid situations where someone might call the IRS. For example, situations may arise with disgruntled former employees (i.e. recently fired) or spouses (i.e. in the middle of a divorce) acting as whistleblowers.
- Do not exaggerate your expenses. Claiming too much for deductions (medical, charity, miscellaneous) and not having substantiation for those types of expenses can be a major red flag for the IRS.
- Additionally, if your deductions are much higher than average for your income level in your geographic area, a deviation from the mean could trigger an IRS examination.
- If you’re in a cash-basis business, it is crucial to be especially careful in properly reporting your income and expenses.
- Avoid consistently filing returns late or paying your taxes late. This is one of the most sure-fire ways to trigger an examination.
Ultimately it is your responsibility to make sure that your return is filed accurately and correctly (even if a CPA files for you). Make sure never to ignore any sort of letter from the government (and if you do get correspondence from the government, make sure to follow proper procedure as to how to respond). If you need an extension of time, you can ask for it. You may want to consider hiring a CPA for handling any audits/examinations.
As you’re preparing your returns for this year, check this list of red flags and make sure to set yourself up for success in avoiding a tax audit.
If you have any questions, contact us.
What is does “Required Minimum Distribution” mean?
The Required Minimum Distribution, or RMD as it is often called, are minimum amounts the federal government requires you to withdraw from your traditional IRA each year.
When do I begin withdrawing my RMD?
You must begin withdrawing the required minimum distribution from your IRA by April 1st of the year following the year in which you reach the age of 70 ½. For example, if you turned 70 ½ in 2013, you have until April 1st, 2014 to withdraw your RMD.
What happens if I don’t withdraw my RMD as required?
Failure to withdraw your annual RMD subjects you to a federal penalty tax. This IRS excise tax is equal to 50% of the amount you should have withdrawn. For example, if your RMD is $10,000 and you withdraw only $6,000, the penalty is 50% of the additional $4,000 you should have withdrawn, subjecting you to a penalty of $2,000.
Avoid the unnecessary 50% penalty by properly planning for the withdrawal of your RMD.
What if I am younger than age 70 ½ ?
There are some general rules for IRA withdrawals that are critical to understand, even prior to age 70 ½.
Anytime you withdraw money from an IRA or retirement account, you are subject to tax.
If you are under the age of 59 ½, there is an early withdrawal penalty equal to 10% of the amount withdrawn (in addition to the federal and state income taxes).
If you are between ages of 59 ½ and 70 ½, if you withdraw money from an IRA account, you will be subject to federal and state income taxes.
If you are over the age of 70 ½, you must begin withdrawing money from your IRA account (see above for more information).
I turned 70 ½ this year, what are my options?
If you turned 70 ½ in 2013, you are allowed to take your first RMD any time between January 1, 2013 and April 1, 2014. For all future years, you can withdraw that particular year’s RMD between January 1st and December 31st of that year.
This does not necessarily mean you should wait until April 1, 2014 to withdraw your 2013 RMD. If you withdraw your 2013 RMD in 2014, you will still be required to withdraw your 2014 RMD by December 31, 2014; this would result in two IRA distributions in the same year and could increase your overall tax bill.
Proper planning should be done before the end of the year to determine the optimal tax and financial strategy for you. Contact us to discuss your options.