If you operate a business out of your home, you may be able to deduct a wide variety of expenses. These may include part of your rent or mortgage costs, insurance, utilities, repairs, maintenance, and cleaning costs related to the space you use.
But the home office tax deduction is a tricky area of the tax code that is full of pitfalls. Some taxpayers are so wary of the deduction that they simply opt not to take it. If you’re in this group, read some of the most common mistakes and then get help.
- Not taking it. This is probably the biggest mistake those with home offices make. Some believe the deduction is too complicated, while others believe taking a home office deduction increases your chance of being audited. While the rules can be complicated, there are now simple home office deduction methods available to every business.
- Not exclusive or regular. The space you use must be used exclusively and regularly for your business.
Exclusively: If you use a spare bedroom as a business office, it can’t double as a guest room, a playroom for the kids, or a place to store your hockey gear. Any kind of non-business use can invalidate you for the deduction.
Regularly: It should be the primary place you conduct your regular business activities. That doesn’t mean that you have to use it every day nor does it stop you from doing work outside the office, but it should be the primary place for business activities such as recordkeeping, billing, making appointments, ordering equipment, or storing supplies.
- Mixing up your other work. If you are an employee for someone else in addition to running your own business, be careful in using your home office to do work for your employer. Generally, IRS rules state you can use a home office deduction as an employee only if your employer doesn’t provide you with a local office to work at.
Unfortunately, this means if you run a side business out of your home office, you cannot also bring work home from your employer’s office and do it in your home office. That would invalidate your use of the home office deduction.
- The recapture problem. If you have been using your home office deduction, including depreciating part of your home, you could be in for a future tax surprise. When you later sell your home you will need to account for this depreciation. This depreciation recapture rule creates a possible tax liability for many unsuspecting home office users.
- Not getting help. There are special rules that apply to your use of the home office deduction if:
You are an employee of someone else.
You are running a daycare or assisted living facility out of your home.
You have a business renting out your primary residence or a vacation home.
The home office deduction can be tricky, so be sure to ask for help, especially if you fall under one of these cases.
Things to remember
Recognizing the home office deduction complexity, the IRS created a simplified “safe harbor” home office deduction. You simply take the square footage of your office, up to 300 square feet, and multiply it by $5. This gives you a potential $1,500 maximum deduction. However, your savings could be much greater than $1,500, so it’s often worth getting help to calculate your full deduction.
Finally, if you are concerned about a potential future audit, take a photo or two of your home office. This is especially important if you move. That way if you are ever challenged, you can visually attempt to show your compliance to the rules.
After years of putting money in your 529 college savings plan, you’re ready to start taking withdrawals to pay tuition bills. Do you know the rules for keeping the withdrawals tax-free?
Here’s an overview of three types of 529 plan distributions.
- Qualified withdrawals. When you take money from the account to pay for college education expenses such as tuition, fees, books, supplies, and equipment, the withdrawals are generally tax- and penalty-free, no matter the age of the account beneficiary.
Caution: Part of the distribution may be taxable when the account beneficiary receives tax-free assistance such as a scholarship. In addition, you must coordinate 529 withdrawals with the American Opportunity Credit and Lifetime Learning Credit, as well as distributions from Coverdell education savings accounts. These rules prevent the use of the same expenses to obtain multiple tax benefits.
- Nonqualified withdrawals. The earnings portion of withdrawals that are used for anything other than qualified education expenses are taxable. You’ll also have to pay a 10 percent penalty on the earnings, unless an exception applies.
- Rollovers. You can deposit or rollover withdrawals into the 529 plan of a family member, or into another account of which you are the beneficiary. When the rollover is completed within 60 days after you take the initial distribution, it’s not taxable.
If you have questions or need help calculating 529 plan withdrawals, please call our office.
Changing jobs and companies can be an exciting opportunity, but you have a choice to make. What will you do with the retirement savings you have built in your 401(k)? Consider these four options:
- Withdraw the money and don’t reinvest it. This is usually the worst choice you can make. Generally, you’ll owe taxes on the distribution at ordinary income rates. (Special rules may apply if you own company stock in the plan.) Unless you’re over age 59½, you’ll pay a 10 percent penalty tax, too. More importantly, you’ll lose the opportunity for future tax-deferred growth of your retirement savings. And once you have the funds readily available, it’s all too easy to spend the money instead of saving for your retirement.
- Roll the money into an IRA. You can avoid immediate taxes and preserve the tax-favored status of your savings by rolling the money into an IRA. This option also gives you full control over how you invest the balances in the future. You have a 60-day window to complete the rollover from the time you close out your 401(k). However, you should always ask for a “trustee-to-trustee” rollover to avoid potential problems.
- Roll the balance into your new employer’s plan. If your new employer allows it, you can roll the balance into your new plan and invest it according to your new investment choices. However, there may be a waiting period before you can join your new plan.
- Leave the money in your old employer’s plan. You may be able to leave the balance in your old plan, at least temporarily. Then you can do a rollover to an IRA or a new plan later. Check with your employer to see if this is an option.
Call if you need help making the right choice for your particular circumstances.
It seems everyone has a tale of a bad rental experience. If you rent anything – a home, a piece of equipment, or a car – here are some hints that can make it a positive experience.
Read all agreements. Read the lease agreement thoroughly prior to signing. Ask for clarification of anything you do not understand. Look for clauses in the agreement that might suggest the property owner has problems with its current tenants. If the agreement seems unfriendly, don’t sign it.
Negotiate up front. Be ready to negotiate your lease terms up front. If anything is unclear in the lease, have it clarified and put in writing. Be very clear about security deposits, first and last month’s rent, and services included in the lease.
Follow the terms. Be the tenant that pays a little early, not the one that always pays late. That way if you ever need a little extra time to pay, you have established the necessary trust to do so.
Proactive disclosure. If you think you will need a temporary exception to part of the lease, try to include it in your upfront negotiations. If this is not possible, consider proactively disclosing the exception to your property owner.
Keep the property clean. This is especially important if you have a pet in your rental property. When landlords come into your home, you will build confidence if the place looks like you treat it as if you owned it. The same is true with rental equipment. Always return it cleaner than you received it.
Know the owner and neighbors. Building a relationship with the property owner and your neighbors helps. If your neighbor has a problem with you, wouldn’t you rather have them come to you than to your landlord? Establishing a good working relationship with a landlord will help you when you need help with a problem in your home or with the equipment you rent.
Leave with a smile. This is especially true for home and vacation rentals. Before you leave, have the property cleaned and hassle-free for the landlord. Request a reference from the landlord for future rentals.
When facing life’s inevitable bumps in the road, an emergency fund is essential to maintaining financial security. Planning for emergencies is like buying insurance: you pay into an account and hope you’ll never have to use it. But life happens. Cars break down. Roofs leak. Kids get injured. Having money in the bank to cover those unexpected expenses can reduce stress and keep you from relying on credit cards and loans to make ends meet.
Here are four easy and effective ways to establish and maintain an emergency fund.
- Start small. Many financial planners advise setting aside enough money to cover at least six months of expenses. That’s a worthy goal. But for many people it’s also a daunting task, an objective that will take years – not months – to achieve. So set a realistic and achievable amount for your emergency fund, and then get in the habit of contributing regularly. Then don’t touch the account except for real emergencies. Leave it alone and it will grow.
- Pump it up. When you get a bonus, cost-of-living adjustment, tax refund, or windfall, consider using a portion of that money to bolster your emergency account. Fight the temptation to increase spending with every new dollar that comes along.
- Make it automatic. With online banking, it’s easy to set up routine transfers from your regular checking account to a separate savings account. If allowed by your employer, allocate a portion of each paycheck to an emergency fund. Consider establishing the account at a financial institution other than your regular bank. As the saying goes, “Out of sight, out of mind.” If the money never shows up in your regular checking account, you’ll be less likely to use it for everyday spending.
- Sell stuff and slash expenses. Think about selling some of your unused stuff through yard sales, online auctions, or consignment shops. This can generate cash to bolster your emergency fund. Take a hard look at your budget and consider everything fair game: expensive dinners, vacations, cable television, and so on. You may find that a surprising number of dollars can be freed up and stashed away in savings. The key, of course, is to direct those savings – immediately, if possible – away from regular spending and into your emergency account.
If you’d like more ideas for setting financial goals or building up an emergency fund, give us a call.