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With the rise of cell phones and the Internet - not to mention a growing fluidity to employment situations - more Americans are choosing to telecommute and work from home.

The tax deduction for home-office expenses is among the most misunderstood and misused (if not unused) tax questions faced by those who work from home. One of the enduring myths is that the deduction is a good way to trigger an IRS audit. This article seeks to clarify the deduction and put those fears to rest for whom the home-office tax deduction is a legitimate business expense.

When Can Home Office Expenses Be Deducted?

The costs associated with maintaining a home office can be deducted only if strict IRS guidelines are met - generally that the office is used exclusively for business purposes. A spare bedroom where your mother-in-law stays while visiting from out of town, a corner of your downstairs family room, the nook in your master bedroom ... these types of home-office spaces rarely qualify under IRS rules.

The Taxpayer Relief Act of 1997 has eased the requirements for determining if the costs associated with a home office can be deducted. The new law states that a home office qualifies as a "principal place of business" if (1) the taxpayer uses the office to conduct administrative or management activities of a trade or business and (2) there is no other fixed location of the trade or business where the taxpayer conducts substantial administrative or management activities of the trade or business.

Deductions will continue to be allowed for a home office meeting the above two-part test only if the taxpayer uses the office exclusively on a regular basis as a place of business and, in the case of an employee, only if such exclusive use is for the employer's convenience.

Home Office Deduction Limits

The home office deduction is limited to the gross income from the activity, reduced by expenses that would otherwise be deductible (such as mortgage interest and taxes) and all other expenses related to the activities that are not house-related. A deduction isn't allowed to the extent that it creates or increases a net loss from the activity. Any disallowed deduction may be carried over to future years.

As part of its stated mission to be "kinder and gentler" to taxpayers, the IRS has eased guidelines somewhat on those taking deductions for their home offices. However, it's a good idea to solicit the advice of a knowledgeable professional to ensure you meet all the requirements before taking this deduction. We can help.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

~Tax Law Advisors~Tax Law Advisors~Tax Law Advisors~

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Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, generating long-term capital gains or investing for dividend income could be two of your big opportunities to save on taxes. Be aware that the Act of 2003 created "sunset provisions," however, meaning that the tax rates on both capital gains and dividends may go up again unless congress acts to extend the rates. The lower rates are currently only legislated through 2008, although many observers believe these rates will eventually be made permanent.

Capital Gains

Rates: The maximum tax rate on net capital gains from assets held 12 months or more has been reduced to 15% (from 20%) for most taxpayers and reduced to 5% (from 10%) for taxpayers in the 10% and 15% tax rate brackets for property sold or otherwise disposed of after May 5, 2003 (and installment sale payments received after that date). The reduced rate applies for both the regular tax and the alternative minimum tax.

(Note: The higher rates that apply to unrecaptured section 1250 gain, collectibles gain, and section 1202 gain have not changed.)

Tax Treatment of Capital Losses: If you incur losses from the sale of a capital asset, you can deduct those losses to the extent they offset capital gains from the sale of other assets. If your losses exceed your gains, you can only deduct up to $3,000 ($1,500 if you are married and filing separately) of capital losses in a tax year against other income on Form 1040. You can carry losses forward and continue to deduct $3,000 ($1,500 if filing separately) annually against other income until your losses are used up.

Other Issues: A long-term gain generally applies to assets held for a minimum of one year or more. Short-term capital gains are considered as part of your Adjusted Gross Income (AGI) and taxed at your ordinary income tax rate. Investors must avoid "wash sales" (selling and repurchasing the same or virtually the same asset), and you should also be aware of potential Alternative Minimum Tax (AMT) implications of taking large capital gains.

Dividends

Changes Create Tax Savings Opportunities: In the past, dividend income was treated as just another source of ordinary income, and taxed at your normal tax rate. Now, the same 15% (or 5%) maximum tax rate that applies to net capital gain also applies to dividends paid by most domestic and foreign corporations after December 31, 2002.

For taxpayers in higher brackets, this represents a significant reduction. Certain dividends from regulated investment companies such as mutual funds, real estate investment trusts, and certain foreign corporations do not qualify for the reduced rates. There are also some holding requirements, consult your tax professional for more details.

As with capital gains, the Tax Relief Act of 2003 also created "sunset provisions" for dividend rates, so tax rates may go up again unless Congress acts to extend the rate reductions. The lower rates are currently only legislated through 2008.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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For most of us, our home represents our largest asset. Over time, the management of this asset can make a big difference in our overall financial outlook. One of the largest planning opportunities home ownership brings is the favorable tax treatment afforded the sale of a primary residence.

The gain on the sale of a home is considered a gain on the sale of a capital asset. Any taxable profit you make is subject to a maximum long-term capital gain rate of 15% (down to 5% for taxpayers in the 10-15% federal income tax bracket) if you owned the house for more than 12 months. Gain on the sale of a home may taxable only if they exceed $250,000 for single filers ($500,000 for joint filers) if certain conditions discussed below are met.

Determining Your Net Gain

To determine your profit (gain), you subtract your basis from the sale price minus all costs and commissions. For instance, if you sell a house for $250,000, and must pay your broker 6% of the sale price -- or $15,000 -- your sale price for determining capital gain tax is $235,000 ($250,000 minus $15,000).

Say you bought that house 20 years ago for $35,000. You have since redone the kitchen and bathrooms, put in new windows, added a bedroom, and a new roof. Your basis in the house is $35,000 plus the cost of all of the capital improvements you have made, providing you have documentation verifying the costs. Let's assume the total cost of those improvements over the 20 years you owned the home is $40,000. In such a case, your basis would be $75,000. Your capital gain would be $235,000 minus $75,000, or $160,000. If you are in the 28% federal tax bracket or higher, your capital gain tax on your home sale would be $24,000 unless you use the principal residence exclusion.

The Primary Residence Exclusion

Here's where the favorable tax treatment of capital gains from a residence come in. A $250,000 exclusion for single filers ($500,000 for joint filers) is now available to all taxpayers. You can claim the exclusion once every two years. To be eligible, you must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange. If you fail to meet these requirements due to health reasons, a change in place of employment, or other unforeseen circumstances, you can exclude the fraction of the $250,000 ($500,000 if married filing a joint return) equal to the fraction of two years that these requirements are met. For example, let's say you were forced to move for employment reasons after only living in a home for 12 months. Without the qualified exclusion, your full tax would have been $20,000. Instead, you would pay just half, since you lived in the home 12 of the 24 months required, or 0.5 of the period. The tax of $20,000 multiplied by 0.5 would yield a tax bill of just $10,000.

For many Americans at or nearing retirement age, their home represents a terrific opportunity to "cash out," pad their retirement portfolio with tax-free gains, and help ensure their "golden years" truly live up to the name. Feel free to ask us for guidance in making this important decision.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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