Wednesday, January 30, 2013

Home office deduction simplified for 2013

The IRS has recently announced a simpler way for taxpayers to take the home office deduction.  One way to think of it as a "standard deduction" for the home office. This is a step in the right direction to simplifying tax preparation for many people.

The new optional deduction allows a flat $5 per square foot of home office as the deduction.  There is a cap at $1500 (or a space of 300 square feet). The basic rules for what is a home office remain the same; that is, a space regularly and exclusively used for business.

Current law for 2012 tax returns require the taxpayer to calculate the percentage of the home used for business, and also track ALL home expenses to determine the amount of the deduction. This is a lot of record keeping. Tracking utility bills, home repairs, maintenance, improvements, insurance, mortgage and taxes can be time-consuming.  In addition, there is a depreciation component based on the cost of the home. Preparing the tax return requires an allocation of mortgage interest and property taxes between the home office and the Schedule A (itemized deductions).  The flat rate eliminates the need for this.

Of course, it wouldn't be a true American tax law without a few exceptions.  Being optional, taxpayers may find the old way is more beneficial for them.  People who use a large percentage of their home for business may find that the $1500 cap unfavorable.  Also, the $5 amount might not be favorable; your actual cost might be more.

If you're someone who already takes a home office deduction, pay close attention to your 2012 tax return. See if the $5/sq foot rate would be better or worse than your actual expenses.  This will be a clue to what you will probably want to do in 2013.

I think the biggest users of this rule change will be folks with very small spaces used for business, such as the corner of a spare room.  Also it will be good for people who have trouble tracking all of their expense or don't keep good records. Under the old law the time and cost of taking the deduction might not have been worth the tax savings. But with this flat rate, it will be very easy. In addition, the mortgage and property tax are still fully deductible on the Schedule A.

Keep in mind this starts next filing season (tax year 2013).

Tuesday, January 15, 2013

Special Provision in new tax law makes me chuckle

After Congress passed the new tax legislation January 1, 2013 I was preparing a training session for our staff on January 5.  I couldn't find any in-depth summaries of the legislation so quickly after it's passing, so I was forced to read the legislation myself.

The document is very difficult to read and understand.  A mish-mash of references to prior tax laws, it only includes the new dates and provisions sprinkled throughout. As I sifted through attempting to make sense of things, one of the provisions made me chuckle.  I thought I'd share it.

Background:  There is a tax law that allows a taxpayer to take a distribution from an IRA and have it go directly to a charity.  Of course, this is not a huge deal because if you took the distribution, then donated the money to charity, you could deduct it on Schedule A and not pay federal tax on it. However, if the standard deduction is better for you than your itemized deductions, you are better off excluding the full amount directly.  Also, if the distribution goes directly to the charity, it does not get included in your Adjusted Gross Income. Lower AGI means possibly less of your social security is taxable, you avoid AMT, or avoid other phaseouts based on AGI.  Also, for Ohio residents, excluding the donation from AGI means you are not paying Ohio income tax on the distribution.

This provision expired December 31, 2011, meaning all throughout 2012 you could not have your IRA distribution go directly to a charity.

Provision:  As I'm reading the new legislation passed January 1, 2013, I see where this provision is extended through 2013. I stop and ponder "why"?  Now that 2012 is over, no one can possibly do anything about their 2012 IRA distibutions.  It's a nice extension for 2013, but too bad for 2012, right?

Then behold!  Congress did not forget that 2012 was over.  Several paragraphs are included as "special provisions".  This just made me chuckle.

To paraphrase the law, you can take a distribution from your IRA and donate it directly to charity in January 2013 and it will be considered a 2012 distribution. (I imagine the IRA companies love this one; I don't think they can backdate a distribution.  And when will you get that 1099R?)

The second part of the special provision allows you to donate to charity in January 2013 the exact amount of the IRA distribution you took December 2012 and exclude it from 2012 income.  My only guess for this one is they think taxpayers were waiting to take their IRA required minimum distribution (RMD) until this provision was extended.  By December, they couldn't wait any longer and took the RMD. Since the law was extended, taxpayers can now donate to the charity as they might have done if the law were in place in 2012.

The whole thing makes me chuckle. These are a couple examples of some of the most convoluted tax law, all because people can't agree in a timely manner. We wonder why our tax code is so complex.

Thursday, January 10, 2013

Big tax changes passed Jan 1, 2013, or not?

Congress pushed the limits of tax legislation this time.  Recent tax legislation was passed January 1, 2013 to avoid the "fiscal cliff".  The tax law includes significant laws effecting 2013. But it even includes tax laws effecting 2012; even though the year had already ended. I'd say "why bother", but there are actually some good things in there.

As far as tax changes; not so much. The American Tax Relief Act of 2012 (ATRA) primarily extends many of the deductions, credits and tax rates we are already used to. If you're looking for some great, new tax breaks, you won't find them. But you won't lose them either.  What you will get is a continuation of most of the great credits and deductions we've had.  The most popular of these are the child tax credit, American Opportunity Credit, and the expansion of the earned income credit to include a third child.  These credits have been extended through 2017.

Other items included in the new law are retroactive extensions of deductions that expired at the end of 2011.  Did you even miss them? You would have very soon. Had the law not been passed, you would have lost these deductions on the tax return you'll be filing in a few weeks.  These are extended through 2013 and include:
  • mortgage insurance premium deductions
  • teacher’s above-the-line deduction
  • state and local general sales taxes
  • tuition and related expenses deduction
You may have heard of the higher tax rates for "wealthy" Americans.  This is the most significant change, but it doesn't really effect most of us.  Tax brackets for income tax and rates for capital gains were scheduled to revert to higher levels on December 31, 2012.  The new tax law keeps the lower rates for everyone with income levels under:

MFJ  $450,000
MFS $225,000
Single $400,000
HOH  $425,000

Most significantly, the Alternative Minimum Tax (AMT) patch, was also reinstated for 2012.  Not only that, it has been made permanent!  Hooray!  Woo hoo! What, you're not cheering?  Long story, but suffice to say many taxpayers would be hit with this tax without the patch. The AMT is now permanently indexed to inflation.

Next time, a blog on my favorite "special provision" in the new tax law.