Month: October 2012

Tax

Take Advantage of Miscellaneous Deductions

A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay. If you are able to itemize your deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. Here are some things you should know about miscellaneous tax deductions:

Deductions Subject to the 2 Percent Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2 percent of your adjusted gross income. Deductions subject to the 2 percent limit include:

      • Unreimbursed employee expenses such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation.
      • Tax preparation fees.
      • Other expenses that you pay to:

1. Produce or collect taxable income,

 

      2. Manage, conserve, or maintain property held to produce taxable income, or

 

    3. Determine, contest, pay, or claim a refund of any tax.

Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.

Deductions Not Subject to the 2 Percent Limit. The list of deductions not subject to the 2 percent limit of adjusted gross income includes:

  • Casualty and theft losses from income-producing property such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
  • Gambling losses up to the amount of gambling winnings.
  • Impairment-related work expenses of persons with disabilities.
  • Losses from Ponzi-type investment schemes.

Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.

There are also many expenses that you cannot deduct such as personal living or family expenses. Call us today if you have questions about miscellaneous deductions.

Tax

Moving This Year? 10 Helpful Tax Tips

If you moved–or are planning to move–this year to start a new job you may be able to deduct certain moving-related expenses on your tax return. You may be able to deduct these expenses even if you kept the same job but moved to a different location.

1. Expenses must be close to the time you start work. Generally, you can consider moving expenses that you incurred within one year of the date you first report to work at a new job location.

2. Distance Test. Your move meets the distance test if your new main job location is at least 50 miles farther from your former home than your previous main job location was from your former home. For example, if your old main job location was three miles from your former home, your new main job location must be at least 53 miles from that former home.

3. Time Test. Upon arriving in the general area of your new job location, you must work full-time for at least 39 weeks during the first year at your new job location. Self-employed individuals must meet this test, and they must also work full time for a total of at least 78 weeks during the first 24 months upon arriving in the general area of their new job location. If your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test. There are some special rules and exceptions to these general rules. Call us for more information.

4. Travel. You can deduct lodging expenses (but not meals) for yourself and household members while moving from your former home to your new home. You can also deduct transportation expenses, including airfare, vehicle mileage, parking fees and tolls you pay, but you can only deduct one trip per person.

5. Household goods. You can deduct the cost of packing, crating and transporting your household goods and personal property, including the cost of shipping household pets. You may be able to include the cost of storing and insuring these items while in transit.

6. Utilities. You can deduct the costs of connecting or disconnecting utilities.

7. Nondeductible expenses. You cannot deduct the following moving-related expenses: any part of the purchase price of your new home, car tags, a drivers license renewal, costs of buying or selling a home, expenses of entering into or breaking a lease, or security deposits and storage charges, except those incurred in transit and for foreign moves.

8. Form. You can deduct only those expenses that are reasonable for the circumstances of your move. Call us if you have any questions.

9. Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, the reimbursement may have to be included as income on your tax return.

10. Update your address. When you move, be sure to update your address with the IRS and the U.S. Postal Service to ensure you receive mail from the IRS. Use Form 8822, Change of Address, to notify the IRS.

Don’t hesitate to call us if you need help figuring out the amount of your deduction for moving expenses. We are here to help.

Business Tax

Hobby or Business? Why It Matters

Millions of Americans have hobbies such as sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Definition of a Hobby vs a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Is Your Hobby Actually a Business?

If you’re not sure whether you’re running a business or simply enjoying a hobby, here are some of the factors you should consider:

  • Does the time and effort put into the activity indicate an intention to make a profit?
  • Do you depend on income from the activity?
  • If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
  • Have you changed methods of operation to improve profitability?
  • Do you have the knowledge needed to carry on the activity as a successful business?
  • Have you made a profit in similar activities in the past?
  • Does the activity make a profit in some years?
  • Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

  • Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.
  • Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.
  • Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Still wondering whether your hobby is actually a business? Give us a call, we’ll help you figure it out.

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