Archive for Tax Tips

Consider remodeling your home

You can exclude up to $250,000 of the gain on the sale of your main home (of $500,000 for married filing jointly) if all you owned and lived in the home for at least 2 of the last 5 years, and if you didn’t sell another home within 2 year.
What this means is that if you spend some money to remodel, the increase in your sales price on the house may be tax free.
For example, say that your house is worth $100,000. But you spend $20,000 to remodel the kitchen and bathroom. If that remodel allows you to sell the house for $130,000, the extra $10,000 you get ($30,000 price increase minus the $20,000 cost of remodel) is tax free.

DISCLAIMER:

THE TAX TIPS ON THIS WEBSITE ARE FOR GENERAL INFORMATIONAL PURPOSES ONLY, AND MAY NOT APPLY TO YOUR PARTICULAR TAX SITUATION.  PLEASE CONSULT A COMPETENT TAX PROFESSIONAL ABOUT ANY QUESTIONS YOU MAY HAVE.

Don’t shy away from a home office deduction

  • Claiming a home office deduction is easier now, partly because Congress recognized that the work force has changed. Many more people are working out of their homes, so it’s not the audit red flag that it used to be. If you legitimately qualify for the deduction, there should be no problem. People who have no fixed location for their businesses can claim a home office deduction if they use the space for administrative or management activities, even if they don’t meet clients there. But you must use the space exclusively for business.

 

  • You are entitled to write off expenses that are associated with the portion of your home where you exclusively conduct business (such as rent, utilities, insurance and housekeeping). The percentage of these costs that is deductible is based on the ratio of the square footage of the office to the total area of the house. A middle-class taxpayer who uses a home office and pays $1,000 a month for a two-bedroom apartment and uses one bedroom exclusively as a home office can easily save $1,000 in taxes a year. People in higher tax brackets with greater expenses can save even more.

 

  • One home office trap that used to scare away some taxpayers has been eliminated. In the past, when you sold your house, whatever portion of your home was an office did not qualify for the tax-free treatment given to the rest of your house. But the Congress has had a change of heart. A home office still qualifies for tax-free profit. You do, however, have to pay tax on any profit that results from depreciation claimed for the office after May 6, 1997. It’s taxed at a maximum rate of 25 percent. Depreciation produces taxable profit because it reduces your tax basis in the home; the lower your basis, the higher your profit.

Provide dependent taxpayer IDs on your return

Provide dependent taxpayer IDs on your return

  • Children and other dependents provide substantial tax breaks, starting with the exemption of $3,700, and a $1,000 child tax credit for each child under age 17. But you have to provide a Social Security Numbers for your children and other dependents on your return. Otherwise, the IRS will deny the tax breaks.
  • Be especially careful if you are divorced. Only one of you can claim your children as dependents. With today’s computers, it’s fairly easy for the IRS to check that spouses aren’t both using their children as a deduction. If you forget to include a Social Security number for a child, or if you and your ex-spouse both claim the same child, the IRS will contact you to straighten things out.
  • The $1,000 child tax credit begins to phase out at $110,000 for married couples filing jointly and at $75,000 for heads of households.
  • After you have a baby, file for your child’s Social Security card quickly so you have the number ready at tax time. Some hospitals will do this for you. If you don’t have the number you need by the tax filing deadline, the IRS says you should file for an extension rather than sending in a return without a required Social Security number.

 

Roth IRA

Consider a Roth IRA. Although Roth contributions are not deductible, they could be the better than a traditional IRA because all withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement.

Contribute to retirement accounts

Contribute to retirement accountsRetirement_accounts 300

  • If you haven’t already funded your retirement account for 2013, you have until April 15, 2014. That’s the deadline for contributions to a traditional IRA, deductible or not, and to a Roth IRA.  But don’t forget that the sooner you make the contribution the sooner you get tax-free growth.
  • To qualify for the full annual IRA deduction in 2012, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, you must have adjusted gross income of $58,000 or less for singles, or $92,000 or less for married couples filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $173,000.
  • For 2012, the maximum IRA contribution you can make is $5,500 ($6,500 if you are age 50 or older by the end of the year).