BIDaWIZ Blog » TAX SAVINGS

Are Travel Expenses Deductible When On A Long-Term Project?

The BIDaWIZ Team — Fri, 27 Mar 2015 21:09:48 +0000

The short answer is that it depends. Generally, the rules for deducting travel and living expenses while away from home depend on how long the work is being performed away from your family home.

Where is your tax home?
The first step we need to do is establish where your tax home is as per IRS Publication 463 and the Internal Revenue Code (IRC) Sections 162 & 274. This is your regular place of business, regardless of where you maintain your family home. Generally speaking, if you and your spouse do not live at your tax home, you cannot deduct the cost of traveling between your tax home and your family home. You also cannot deduct the cost of meals and lodging while at your tax home. However, there is an exception to the rule in which you are only on a temporary assignment. This means that you expect to be at your temporary assignment for less than a year. In this case, your tax home does not change to your work location, but continues to be where you reside. Thus, you would be able to deduct travel expenses and living expenses that are not reimbursed by your employer.

What if my assignment is longer than a year?
If you expect to work for more than 1 year in the new business location, you would not be able to deduct travel and living expenses as your tax home changes to the new location. Travel and living expenses are considered personal expenses in this instance.

How does a taxpayer claim these expenses?
Please note that if the taxpayer meets the temporary assignment requirement for a tax home, they can deduct the expenses on Form 2106, which flows to Schedule A of your form 1040. If the taxpayer is self-employed, the expenses are reported on Schedule C, assuming the business is taxed as a sole proprietorship or disregarded entity.

More questions? Browse answers or ask travel expense tax questions online.

Do You have Any Unclaimed Tax Refunds?

The BIDaWIZ Team — Fri, 13 Mar 2015 20:08:03 +0000

If you haven’t filed your 2011 tax return and claimed your refund yet, you may be one of the 1.2 million taxpayers that are owed $1 billion in 2011 tax refunds. The IRS estimates more than half of the refunds are for at least $698.

When is the deadline to claim your 2011 tax refund?
The clock is ticking, so you’d better act fast if you want your tax refund. You need to file a return for 2011 no later than April 15th, 2015. If you don’t file by then, the monies will be handed over to the US Treasury.

The total tax refunds may be even higher
If you don’t file a tax return, the IRS does it for you in what is called a substitute for a return or ghost return. The return is constructed based on the income reported by third parties on W-2 and 1099 forms. However, the IRS usually claims the standard deduction for you as they don’t have access to your itemized deductions and the associated supporting documentation. Therefore, there could potentially be than the $1 billion in reported unclaimed tax refunds as itemized deductions haven’t been applied to these ghost returns.

Why is there so much in unclaimed tax refunds?
In some cases, people earned too little income so they didn’t need to file a tax return, even though they had taxes withheld from their wages, or they made quarterly estimated tax payments.

In other cases, people with low or moderate incomes might not have claimed the maximum Earned Income Tax Credit (EITC) of $5,751 for having three or more children. You might have been eligible for the EITC in 2011 if you had three or more children and earned less than $43,998 ($49,078 married filing jointly). The income limit was $40,964 ($46,044 married filing jointly) for those with two children. The income limit was $36,052 ($41,132 married filing jointly) for those with one child, and $13,660 ($18,740 married filing jointly) for those who were childless.

Do I simply need to file a 2011 tax return to get the money owed to me?
While you just need to submit your return to claim a refund, the money won’t be sent to you unless your financial house is in order. You must have filed your tax returns for 2012 and 2013. And if you owe money to the IRS, your refund will be applied to that balance. It also might be used to offset unpaid child support or federal debts, like student loans.

More tax questions? Browse answers or ask tax refund questions online.

A Lesser-Known Way To Maximize Your Tax Deductions

The BIDaWIZ Team — Thu, 27 Nov 2014 15:47:42 +0000

Tax planning over the long-term should not just focus on your projected income in relation to expenses. Rather, the timing for the payment of those expenses in itself can easily yield thousands of dollars in tax savings. In addition, unless a taxpayer anticipates a large change in their income due to an investment or a home sale or retirement, chances are that your income will not be fluctuating that much from year to year. So, what is this lesser-known tax planning technique?

The standard deduction versus itemizing expenses
A classic question that always arises is whether or not to itemize or use the standard deduction. The general guidance is to claim the one that provides the greatest tax benefit. In many cases, the taxpayer will need to compare the standard deduction with their actual itemized expenses. For 2014, the standard deduction for married couples filing a joint return is $12,400 and $6,200 for single individuals and married couples filing separately. For those filing head of household, the standard deduction is $9,100. In comparison, by itemizing deductions, taxpayers are electing to claim the their actual mortgage interest, charitable deductions, state and local taxes and other expenses.

Tax deduction planning
While the tax benefit comparison of electing the standard deduction versus itemizing can be a useful exercise in maximizing tax savings in a given year, the benefit can be greater if utilized over a period of two years. Specifically, the taxpayer may be able to boost overall deductions for every two-year period by alternating between the standard deduction and itemizing each year. This would mean making your charitable donations and state and local tax payments in the year you itemize for the current year and pre-paying for the following year. This would effectively double your itemized deductions for the year.

Here’s the scenario. You’re married and filing jointly with eligible itemized deductible expenses of $15,000 in state income taxes, property taxes, mortgage interest and qualified charitable donations. The potential itemized deductions for the year are only marginally greater than the $12,400 standard deduction allowed for joint filers. However, if the taxpayer claims two years’ worth of charitable donations in a single year and prepays next year’s state and local taxes by December 31, that $15,000 could increase to $20,000 plus. Suddenly, the taxpayer can deduct far more than the standard option by itemizing. In the following year, they will not be able to claim the same charitable donations and state and local taxes paid in the prior year, but they can claim the standard deduction instead. The amount available to itemize would ideally be much less than the $12,400 standard deduction. The tax savings by utilizing this approach could be in the thousands.

Are there any drawbacks to utilizing this strategy?
Yes, it’s possible that the taxpayer has less financial flexibility as a result of prepaying these expenses. In addition, they would lose out on the interest earned on those monies. Having said that, interest rates are still low, so the loss would be minimal.

Taxpayers may also find solace in claiming the standard deduction each year as it’s less paperwork in preparing their tax return each year.

In addition, certain states don’t allow taxpayers to deduct prepaid state and local taxes. This could be a deal breaker in utilizing this strategy.

More questions? Browse answers or ask tax questions online.

When Can You Deduct Commuting Costs?

The BIDaWIZ Team — Fri, 07 Nov 2014 22:08:56 +0000

The average American worker travels 50 miles a day commuting back and forth to work (US Census). This equates to about 12,500 miles per year, assuming a two week vacation is taken. Frequently, taxpayers question whether or not they can claim this commute as a tax deduction via the standard mileage provision in the tax code. Although your daily commute to work is generally not an eligible tax deduction, there are several instances in which the standard mileage deduction can be claimed.

Can employees deduct commuting expenses?
Generally speaking, the IRS prohibits taxpayers that work for someone else from deducting commuting expenses or travel from their home to their home office (IRC Section 274(d). However, travel expenses from an employee’s home office to a client site that is not reimbursed by the employer is considered a deductible expense and reported on Schedule A as a miscellaneous expense. This also applies if you are traveling directly from your personal home to a client site on a short-term or temporary basis (less than 1 year). In this case, you may claim the standard mileage deduction for the total distance traveled. As you may be wondering, what happens if the work at the client site is no longer temporary? In that case, you would be able to treat the commute as temporary up until the time when the expectation for the duration of the engagement changes to long-term (IRS Publication 463 & Rev. Rul. 99-7).

What if I am self-employed?
The rules are more lenient for self-employed taxpayers that work from home. First, you need to meet the home office requirement. To do so, your home must be used primarily for business activities or for marketing or administrative functions such as accounting, strategic planning or for preparing reports. When you travel to another location to host a meeting or even to go to your bank, those expenses would be deductible. When traveling from your home office to other temporary business locations or clients sites, you can deduct the actual travel expenses or claim the standard mileage rate of $0.565 per mile. For instance, if you traveled a total of 1,000 miles to various business locations, you could deduct $565 (1,000 * $0.565). The total tax deduction $565 would result in a $158.20 reduction to your overall tax liability which assumes a 28% tax rate. If you choose to claim the actual expenses, you would need to allocate the expenses by the portion of miles used for business travel versus personal travel as detailed in IRS topic 510.

If you do not have a regular place of work, but ordinarily work in the metropolitan area where you live, you can deduct daily transportation costs between your home and a temporary work site outside that metropolitan area.

What supporting documentation do I need to claim these expenses?
You should have a daily log detailing your business travel with pertinent information related to the client site, miles traveled, date/time etc. However, if you haven’t been very diligent, you can still go back and estimate your mileage according to your daily route.

More Questions? Ask your tax deduction questions or find a cpa online.

Can You Deduct Summer Day Camp Expenses For Your Kids?

The BIDaWIZ Team — Fri, 11 Jul 2014 22:17:30 +0000

You may have already sent your children to summer day camp or are planning to in the upcoming month. While these summer camps can be pricey, the good news is that those costs may qualify for tax write-offs for your 2014 tax return.

Deducting summer day camp expenses
For 2014, parents that work and send their children to day camp can claim the child and dependent care credit of up to $3,000 or $6,000 for the care of two or more children under the age of 13. Parents with adjusted gross income that surpasses $43,000 are limited to a tax credit equivalent to 20% of qualified expenses, up to $3,000. For instance, if summer camp costs $5,000, you could claim a tax credit of $1,000 or 20% of qualified expenses. Even if you earned $1 million, you are eligible for the tax credit granted that your spouse also works, is looking for work or is a full-time student. That’s the big catch, both eligible parents must have earned income (employment income, not investment income), or is seeking employment, or is a full-time student. For those seeking employment, you will need to maintain documentation detailing your efforts to obtain employment.

Flexible Spending Accounts Can Also Be Used
You can tap into your flexible spending account (FSA) to pay up to $5,000 of your pretax income for summer day camp. Please note that you can only claim the child and dependent care tax credit for expenses that exceed the amount you have set aside in your flexible spending account.

Maintain receipts to claim the tax breaks
Any invoices and receipts you receive from the camp should be kept for tax reporting next April. You will also need the camp’s employer identification number for proper reporting. Don’t be afraid to ask them for this important information.

Do overnight summer camps qualify?
No, unfortunately the tax benefits only apply to summer day camps.

More questions? Browse answers or ask tax credit questions online.

Are Condominium Common Area Expenses Deductible?

The BIDaWIZ Team — Sun, 20 Apr 2014 16:43:07 +0000

Many baby boomers that are beginning retirement may be selling their homes to move into a condominium. Others may be motivated to purchase a condo for a secondary source of income. Whichever the case, new condo owners should maximize their tax savings when incurring various expenses.

Condominium common area expenses
A condominium is different from a house in many respects. For instance, condos typically do not have a yard or basement. Instead, condominium owners share land, lobbies, elevators, stairs, pools, and other service areas. As such, condominium owners generally pay dues or assessments to a special corporation that is organized to manage the common areas.

Are these expenses deductible?
The short answer is that common area expenses are not deductible if the condo is being used as personal property. However, if the condominium association makes a capital improvement to the property, the owners can add their pro-rata share of the expense to their cost basis. It is important to save the supporting documentation detailing the nature of the improvement since it will be incorporated in your capital gains tax calculation when you eventually sell the condo. For instance, if you incurred a $10,000 expense for a common area capital improvement, that amount will be added to your basis and you may be able to save up to $2,380 in taxes when you sell the condo. This assumes you are in the highest ordinary income tax bracket and are subject to the new investment income surtax.

Are the expenses deductible if you rent the condo?
Condo owners that rent the property throughout the year can immediately claim common area repair and maintenance expenses incurred as per IRS Publication 527 and IRC Section 280A. However, owners cannot deduct special assessments they pay to the condominium management corporation for improvements. Instead, the owner would recover their share of the cost of any improvement by claiming depreciation over time. If you’re wondering how to determine the difference between a repair and a capital improvement, it depends on the specific situation. For instance, if the condominium management corporation is repaving an existing surface, it’s treated as maintenance or a repair cost for the condo owner. This expense would be treated as a capital improvement if there was not an existing paved path.

More questions? Browse answers or ask your condo tax deduction questions online.

Tax Deductible Health Savings Account Contribution Deadline

The BIDaWIZ Team — Tue, 08 Apr 2014 00:12:18 +0000

The tax deadline is also an important date for health savings account (HSA) contributions. Similar to an IRA, you have the option of electing whether or not you want to apply the contributions to the 2013 or 2014 tax year. Find out the best ways to use your health savings account.

Health savings account contribution limits for 2013
You can contribute up to $3,250 for individual health insurance coverage and $6,450 for family coverage and an additional $1,000 if you’re 55 years or older. To contribute to a health savings account, you must have a high-deductible health insurance plan of at least $1,250 for individual coverage and $2,500 for a family plan.

What is the tax benefit?
It works similar to a traditional 401(k). Specifically, the tax deduction health savings account contributions lowers the account holder’s modified adjusted gross income. In addition, the contributions grow tax-deferred and can be withdrawn tax-free to pay for current and future medical expenses. Unlike a flexible spending account (FSA), the account holder does not have to use the funds by the end of the year.

What medical expenses qualify for a health savings account?
Account holders can apply out-of-pocket medical expenses to their health savings account. This would include co-payments for medical care and prescription drugs, your deductible, and other items that aren’t covered by insurance such as routine dental work. Please note that most health savings account administrators provide the covered individual with a debit card to use for these expenses.

How much does a health savings account cost?
Many employers cover the fees associated with the account such as administrative costs. If you have an individual or family plan you opened yourself, you may be subject to a start-up fee and then a $3 to $5 monthly fee and/or transaction fees. It shouldn’t cost you more than $50-$100 annually, but be aware of the transaction fees. There are also other fees for items such as excess contributions, copy of account and tax statements, and account closures.

More Questions? Browse Answers or ask your hsa tax questions.

Should My Mother Transfer Title To Her Home Now?

The BIDaWIZ Team — Thu, 03 Apr 2014 02:06:06 +0000

The answer to this question depends on many different factors and taxes alone shouldn’t be the only concern when transferring property to your children. Having said that, a gift now may impact your children’s tax liability later on.

Should your mother transfer title to her home to you?
If your mother transfers title of the property to you, then it is treated as a gift for tax purposes. Your mother can claim the lifetime gift tax exemption of $5.34 million, but she will still need to file the gift tax information form 709 since the gift likely exceeds the annual limit of $14,000 for single filers. If you go forward with this plan, you will obtain her basis in the property which is the original purchase price plus improvements. The main drawback for this option is that you obtain her original basis and thus may be subject to capital gains taxes should the home be valued with a gain in excess of $250,000 when it is eventually sold. As a single filer, you can exclude up to $250,000 of your capital gain per Internal Revenue Code Section 121. Thus, if the gain is $250,000 or less it may not matter if your mother gifts you the property today.

What if your mother doesn’t transfer the property into your name?
The second option is actually to do nothing. In this case, your mother will remain on the title of the home. At the time of her passing, your basis in the home steps-up to the fair market value per Internal Revenue Code Section 1014. This may be a more attractive option than transferring the property if the home if very valuable and the gain would be in excess of the $250,000 exclusion previously mentioned.

Setting up a qualified personal residence trust (QPRT)
The third option is for your mother to transfer the property into a trust via a qualified personal residence trust. This option should only be considered if the home is very valuable. We’ll go through the nuances of this option should you respond that the home is very valuable.

More estate tax questions? Browse answers or ask tax planning questions online.

We Now Know How The IRS Will Treat Bitcoins

The BIDaWIZ Team — Fri, 28 Mar 2014 20:55:28 +0000

The uncertain future of bitcoins as a viable form of “currency” remains. Having said that, the IRS has in many respects given this form of “currency” some legitimacy by ruling how it should be recognized for tax purposes. The mere fact that the IRS is acknowledging bitcoins bodes well for the many digital currency enthusiasts out there. Still, how does the IRS ruling impact your taxes?

What is a bitcoin in layman’s terms?
A bitcoin is a decentralized peer to peer digital “currency” that is managed by a computer network called “miners.” Think of gold, except the currency is digital bits. This means that there is little if any processing fees and the “currency” can be transmitted instantaneously throughout the world for goods and services. There’s little oversight from a regulatory perspective, but central banks around the world are beginning to observe the “currency.”

The IRS treats bitcoins as “property”
The IRS ruled that bitcoins should be treated as property and not currency since it does not have legal tender status in any jurisdiction. Essentially, this means that no government backs the bitcoin as compared to a prevalent currency such as the US dollar. In addition, bitcoins will be treated as capital assets. Specifically, bitcoins held at a gain for less than a year will be taxed at ordinary income rates or as high as 43.4% and those held for a year or longer will be taxed at capital gains rates as high as 23.8%.

What if a business accepts bitcoins?
Be prepared for an accounting headache. Let’s suppose you sell clothing and accept bitcoins as a form of payment. The customer may pay $50 with a bitcoin that they originally purchased for $25 (We’re keeping the numbers low for simplicity sake). The customer would recognize a $25 capital gain and the seller would report $50 in gross income. Then, if that bitcoin goes up or down in value, the business will need to mark to market that asset.

What does this means for employers?
If you plan to compensate your employees with bitcoins, which we do not recommend, you will need to report it on a W-2 Form and withhold income and payroll taxes. The same reporting requirements are expected for independent contractors that are paid with bitcoins.

When does this ruling go into effect?
Bad news. The ruling is effective immediately and covers past and future transactions and tax returns. It does appear though that the IRS will offer some relief for underpayment penalties if the taxpayer shows reasonable cause.

How does this impact me?
It’s important to put this all into perspective. Intellectually, bitcoins provide the possibility for an innovative way for businesses, consumers and individuals to lower the cost and greatly increase the speed to make payments. Having said that, there are only 5 million bitcoin wallets and likely less than 10% of them are active. Thus, the usage is still minuscule in comparison to the mainstream currencies that we use every day. For all these reasons, we don’t believe you should be too worried at all about this tax ruling now or into the near future unless you absolutely have to hold bitcoins. We will continue to observe the developments.

More bitcoin tax questions? Browse answers or ask bitcoin tax questions online.

Do You Have Any Unclaimed Tax Refunds?

The BIDaWIZ Team — Fri, 21 Mar 2014 22:32:34 +0000

If you haven’t filed your 2010 tax return and claimed your refund yet, you may be one of the 918,600 taxpayers that are owed $760 million in 2010 tax refunds. The IRS estimates more than half of the refunds are for at least $571.

When is the deadline to claim your 2010 tax refund?
The clock is ticking, so you’d better act fast if you want your tax refund. You need to file a return for 2010 no later than April 15th, 2014. If you don’t file by then, the monies will be handed over to the US Treasury.

The total tax refunds may be even higher
If you don’t file a tax return, the IRS does it for you in what is called a substitute for a return or ghost return. The return is constructed based on the income reported by third parties on W-2 and 1099 forms. However, the IRS usually claims the standard deduction for you as they don’t have access to your itemized deductions and the associated supporting documentation. Therefore, there could potentially be than the $760 million in reported unclaimed tax refunds as itemized deductions haven’t been applied to these ghost returns.

In other cases, people with low or moderate incomes might not have claimed the maximum Earned Income Tax Credit (EITC) of $5,666 for having three or more children. You might have been eligible for the EITC in 2010 if you had three or more children and earned less than $43,352 ($48,362 married filing jointly). The income limit was $35,535 ($40,545 married filing jointly) for those with one child, and $13,460 ($18,470 married filing jointly) for those who were childless.

Do I simply need to file a 2010 tax return to get the money owed to me?
While you just need to submit your return to claim a refund, the money won’t be sent to you unless your financial house is in order. You must have filed your tax returns for 2011 and 2012. And if you owe money to the IRS, your refund will be applied to that balance. It also might be used to offset unpaid child support or federal debts, like student loans.

More tax questions? Browse answers or ask tax refund questions online.