IRS Offers Simpified Home-Office Deductions

For 2013, there is a new simplified method of claiming home-office deductions. The new procedure doesn't replace the current actual cost method, but it offers a "safe-harbor" alternative.

Under the current "actual" method, you determine the actual home office expenses such as depreciation, property taxes, insurance, utilities, repairs and mortgage interest (or rent, if a tenant). Deductible expenses are based on the percentage of your home devoted to business use (square footage of your home office to the entire home).

Under the optional "simplified" new method, you simply multiply the square footage of your home office by $5.00. The maximum allowable area for for home-office deductions is 300 square feet, which caps the deduction at $1,500.

The following considerations apply to either method:

  • The area claimed must be regularly and exclusively for business. This means it must be either your principle place of business or a place where you meet or deal with customers in the ordinary course of business. If you're an employee, the use of your home must be for your employer's convenience.
  • For each year, the deduction is limited to the net business income remaining after all other deductions have been subtracted.
  • Business expenses not connected to the use of your home (such as supplies, advertising, and wages) remain fully deductible.

You are permitted to change between the simplified and actual methods from year to year, but the method you choose is irrevocable for that year. If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home.

New Estate Tax Rules Bring Calm After the Storm

To the relief of taxpayers and planners, Congressional action made only small changes to the
estate rules.

  • The estate and gift tax exemptions are $5,250,000 in 2013, up from $5,120,000 in 2012. This will adjust for inflation going forward.
  • The top tax rate for estates and gifts exceeding the exemption is 40%, up from 35% in 2012, but better than the 55% rate that would have been the law had Congress not acted.
  • A surviving spouse is still able to access the unused portion of the estate exemption of the deceased husband or wife.

It's important to note that the exemption applies to both inheritances and lifetime gifts. The cumulative combined "transfer" exemption will be $5,250,000 whether the money is given away before or after you die. In addition, you can give away up to $14,000 annually to as many recipients as you like without tapping into your lifetime transfer tax exemption.

Average folks with estates far under $5 million may wonder how any of this applies to them. But the reality is everyone needs an estate plan. The backbone of your estate plan is a will, an essential legal tool to ensure your final wishes are honored. A will can also indicate who will take care of your children should you pass away, and how the children can access their inheritance. If you want to include your favorite charity in your estate plans, there are strategies available to benefit both family and charity alike.

Also, it is important to remember that states have their own rules. Washington State does not have a gift tax, but the estate tax starts at $2 million.

While it’s tempting to breathe a sigh of relief, don't let the current rules lull you into complacency. Contact us and your attorney for a review of your estate plans today.

What May Trigger An IRS Audit?

The IRS often audits returns for the following reasons:

  • Unreported Income - The IRS matches the W-2s and 1099s (Interest, Sale of securities, Dividends, and Miscellaneous Income). Taxpayers are generally contacted if they have not reported a 1099 or W-2.
  • Travel and entertainment deductions - The Intemal Revenue Code requires who, what, where, when and why of all travel, meals and entertainment. The IRS wants to see the hotel bill not just the credit card receipt. This is a prime audit target.
  • Large charitable gifts - Can be suspicious if disproportionate to your income.
  • Home-office deductions - Deductions are often claimed by taxpayers who do some work at home but don’t qualify for a home office.
  • Cash businesses - The IRS is more likely to audit returns of businesses dealing in cash.
  • Hobby losses - enerally, only losses Hom a bona lide business are deductible.
  • Foreign bank accounts - The IRS is pursuing Lmreported income from offshore accounts.

What are your chances of an IRS Audit?

According to figures recently released by the IRS, approximately 1.11% of all 2010 individual tax returns were audited in 2011, the same as in 2009. The rate has hovered around 1% for several years.

The IRS audit rate is 1.02% for taxpayers with income of less than $100,000. For those with income of $200,000 or more the audit rate increased to 3.93%. or roughly one out of every 25 returns. Audits jumped to about one out of eight for income above $1 million.

Your responsibility to prove

The responsibility to prove (substantiate) income, deductions, and statements made on your tax returns is known as the "burden of proof." Records such as receipts, canceled checks, and other documents that support an item of income, a deduction, or a credit must be kept, but you may choose any record keeping system that clearly shows your income and expenses.

Health Care Tax Benefits

With all the talk this year about medical costs and government benefits, it is easy to lose sight of the basic health care tax benefits already provided by Congress.

In 2012 taxpayers who itemize deductions on their tax return can deduct medical costs exceeding 7.5% of their (AGI) adjusted gross income, (increasing to 10% for taxpayers under age 65 in 2013).

Here's a tip: What counts is when you paid the bill, not when the treatment or prescription was received.

Types of costs that qualify for the medical deduction

Eligible expenses include those required to treat, prevent, or mitigate a disease or other medical condition. Such costs include prescription drugs, hospital bills, and premiums paid on health and dental insurance. And these costs can be incurred on behalf of yourself, a spouse, or a dependent. Just be sure to keep all applicable receipts to substantiate your expenses.

A deduction often overlooked is travel expenses incurred to receive medical care.

  • Travel by car: You can either deduct actual out-of-pocket expenses or the medical mileage rate of 23¢ per mile.
  • Lodging expenses for medical care are limited to $50 per night. You can include lodging for a person traveling with the person receiving the medical care, (a parent traveling with a sick child, up to $100 per night). Lodging is only deductible if the medical treatment is received from a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital and the lodging is primarily for or essential to the medical care received. Meals are NOT deductible.

Non-deductible Costs

Non-deductible costs (merely beneficial to general health) include:

  • Babysitting expenses to enable parent to visit a doctor
  • Hair transplant
  • Health club dues
  • Hygiene supplies
  • Illegal operations and treatments
  • Imported prescription drugs
  • Insurance (accidental loss of life, limb, loss of earnings during disability)
  • Marriage counseling
  • Maternity clothes
  • Medicines and drugs from other countries
  • Nonprescription drugs and medicines
  • Nutritional supplements, including vitamins
  • Trips, for general improvement of health
  • Weight loss program to improve appearance

To further explore your deduction options, contact our office.

A Buy-Sell Agreement Helps You Plan for Contingencies

What would happen to your business if you die, retire, or become disabled? With a "buy-sell"agreement, you are able to plan for many contingencies over which you would otherwise have little control. A buy-sell agreement is a contract between the business entity and all the entity's co-owners. The agreement typically covers valuing the business, identifying events that would bring the agreement into effect, and defining the transfer of ownership.

The advantages of a buy-sell agreement include:

  • Providing a framework for a smooth transition of control to successor(s).
  • Facilitates estate planning objectives; can help minimize certain estate taxes and can be structured to take advantage of favorable redemption rules upon death.
  • Fixes value for estate tax purposes; includes a method for valuing ownership interests and establishing a fixed value for the estate upon its owner's death.
  • Forces owners to deal with liquidity issues; how would a buyout be funded.
  • Helps prevent loss of tax benefits - especially for S corporations in which transferred stock could lead to termination of the S election. It can disallow the transfer of shares without the consent of owners.

Something as valuable as the ownership and management of a small business should not be left to chance. The buy-sell agreement needs to satisfy all parties involved, including the IRS requirements for tax purposes. For assistance with the tax consequences of a buy-sell agreement or a tax review of your current buy-sell agreement, please contact us.