Tag Archives: deduction

Make the Most of Your Vehicle Expense Deduction

Tracking your miles whenever you drive somewhere for your business can get pretty tedious, but remember that properly tracking your vehicle expenses and miles driven can lead to a significant reduction in your taxes.

Here are some tips to make the most of your vehicle expense deduction.

  • Keep track of both mileage and actual expenses. The IRS generally lets you use one of two different methods to track vehicle expenses – the standard mileage rate method or the actual expense method. One year the mileage method may result in a higher deduction, while the actual expense method may be higher in a subsequent year. But you won’t know which method results in a higher deduction unless you track both your mileage and actual expenses.
  • Consider using standard mileage the first year a vehicle is in service. If you use standard mileage the first year your car is placed in service, you can then choose which expense tracking method to use in subsequent years. If you initially use the actual expense method the first year your car is placed in service, you’re locked in to using actual expenses for the duration of using that car in your business. For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate the first year.
  • Don’t forget about depreciation! Depreciation can significantly increase your deduction if you use the actual expense method. For heavy SUVs, trucks, and vans with a manufacturer’s gross vehicle weight rating above 6,000 pounds, 100% bonus depreciation is available through the end of the 2022 tax year if the vehicle is used more than 50% for business purposes. Regular depreciation is available for vehicles under 6,000 pounds with annual limits applied.
  • Don’t slack on recordkeeping. The IRS mandates that you track your vehicle expenses as they happen (this is called contemporaneous recordkeeping). You’re not allowed to wait until right before filing your tax return to compile all the necessary information needed to claim a vehicle deduction. Whether it’s a physical notebook you stick in your glove compartment or a mobile phone app, pick a method to track your mileage and actual expenses that’s most convenient for you.

Please call if you have any questions about maximizing your business’s vehicle expense deduction.

Say Goodbye to the College Tuition Deduction

It’s hard enough to watch your child leave for college. Now you also have to say goodbye to the tuition and fees tax deduction. Congress decided not to extend this $4,000 deduction for 2017, leaving many parents worried that college will now be more expensive.

But it isn’t as bad as it sounds. That’s because Congress left in place two popular education credits that often offer a more valuable tax break:

The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).

Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $132,000 per year (or singles making $66,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student.

So who is affected by the loss of the tuition and fees deduction? If you are paying for your student’s graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction was generally the only means you had to reduce your tax bill.

But there’s still hope! In addition to the two alternative education credits, there are many other tax benefits that reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives.

Twelve Common Snags to Finalizing Your Tax Return – Part 2

Last week we gave you the first half of a list of items that are often overlooked that cause trouble in filing a timely tax return.  Here’s the second half of the list!

Name mismatch – If you’ve recently married or divorced, make sure your last name on your tax return matches the one on file at the Social Security Administration.

Inconsistent information – Most tax preparation software will check a tax return for inconsistencies. The message “Diagnostic Error!” will make you cringe. When one occurs, they must be resolved prior to filing your tax return. An example might be you filing Married Filing Separate, while your soon-to-be ex-spouse files as Married Filing Joint or Single.

No information for a common deduction – If you claim a deduction, you will need to provide support to document the claim.

Missing cost information for transactions – Brokers send out their statements with the sales transactions. You will need to also provide the cost and purchase information (cost basis) or the tax return cannot be filed.

Missing K-1 – If you have ownership of a partnership, Sub Chapter S or LLC, you should receive a Form K-1 that reports your share of the profit or loss from the business activity.  Without this K-1, you cannot file your tax return.

Forms with no explanation – If you receive a tax form, but have no explanation for the form, questions arise.  For instance, if you receive a retirement account distribution form, it may be deemed income. If it is part of a qualified rollover, no tax is due.  An explanation is required to file your information correctly.

Hopefully, by knowing these common missing pieces of information, you can prepare to have your tax filing process a smooth one!

The Three Rules Behind a Uniform Deduction

Over the years, the courts have established three criteria that an employee must satisfy before claiming a tax deduction for work-related clothing:

  • Is the clothing required or essential in the taxpayer’s employment?
  • Is the clothing not suitable for wear outside of work?
  • Does the taxpayer in fact not wear the clothing outside of work?

What ultimately dooms most taxpayers, is the second requirement. A polo shirt wears nicely on almost any occasion, from playing 18 holes of golf to walking around an amusement park. Similarly, a suit worn by a CEO can also be worn to a friend’s wedding. And a personal fitness trainer can just as easily wear her yoga pants and running shoes on a trip to the mall as she can helping a client work out.

As a result, the Tax Court can make quick work of the issue, concluding that you are not entitled to a deduction for the clothing. The lesson, of course, is that in order to get a tax break for work clothing, the clothing must be so specific, customized or unique that it could only be worn at your place of employment.

Going Back to College? How to Deduct Tuition Costs

Can you deduct the cost of going back to a school to get ahead in your career? It depends.

The tax law is clear on this issue whether you’re returning to school full-time or just enrolling in a summer refresher course. To qualify for deductions, you must meet one of these two requirements.

  1. The education is required by your employer or the law to keep your present job or present work status. In other words, the education must serve a legitimate business interest.
  1. The education maintains or improves skills needed in your present job.

That seems easy enough, but you’re not done quite yet. Even if you meet one of the two requirements, you still flunk out if either:

  • The education is needed to meet the minimum educational requirements of your present trade or business.
  • The education is part of as study program that will qualify you for a new trade or business.

This is where things often become blurry. If you take courses that could ultimately lead to an advanced degree, like an MBA or law or medical degree, the IRS could say that the studies qualify you for a new trade or business, even if you don’t intend to switch your field. Not surprisingly, this issue is often contested in the courts. Despite a handful of isolated incidents, the IRS usually prevails.

Assuming that the coursework doesn’t qualify you for a new trade or business – expenses such as tuition, books, laptops, lab fees, supplies and similar items; costs of writing, researching and preparing term papers; and some limited travel and transportation expenses may be deductible.

Even if you qualify, however, business education expenses are deducted as miscellaneous expenses subject to the usual threshold of 2% of adjusted gross income (AGI). If you don’t clear this 2%-of-AGI floor, none of the expenses are deductible on your tax return.

These are hard lessons for many taxpayers to learn. When possible, other alternatives such as using an employer-sponsored educational assistance plan may be preferable. Under such a plan, an employer can provide up to $5,250 of tax-free educational benefits to each employee.

Home Office Deduction Made Simple

Do you work at home or have a home-based business? If so, you should be aware that the IRS has created a simpler option for calculating the deduction for the business use of your home. The new option makes recordkeeping easier because, instead of maintaining records of specific home office expenses, you can use a standard rate per square foot. The rate is $5 per square foot (up to a maximum of 300 sq. feet or $1,500) for qualifying business use space in place of taking a pro rata percentage of items such as mortgage interest, taxes and repairs.

Keep in mind there are good and bad aspects to this “simpler” method. The new method gives you back your full interest and tax deduction on schedule A, but you will lose your depreciation and loss carryover deductions. Of course, you must still use your home office regularly and exclusively for business. This may be a welcome relief for some taxpayers, but it might not be the best choice for others.

If You Plan On Claiming That Charitable Deduction, Read This

Donating to charities you support is a very noble thing.  But, if you plan to take a tax deduction for your gift, you must have the proper paperwork.  Assembling the correct documentation can be tricky because the requirements vary based on whether the donation is cash and on the value of your gift.  For example, if you donate less than $250 in cash, a canceled check, credit card statement or similar record may be sufficient.  However, if you give more, you will need a written acknowledgement from the charity.  An additional tax form – and possibly an appraisal – may be needed for non-cash donations (depending on their value).  Lastly, the organization you donate to must qualify as a charity under IRS rules.