Top Six Tips about the Home Office Deduction

If you use your home for business, you may be able to deduct expenses for the business use of your home. If you qualify you can claim the deduction whether you rent or own your home. If you qualify for the deduction you may use either the simplified method or the regular method to claim your deduction. Here are six tips that you should know about the home office deduction. 

1. Regular and Exclusive Use.  As a general rule, you must use a part of your home regularly and exclusively for business purposes. The part of your home used for business must also be:

Your principal place of business, or

A place where you meet clients or customers in the normal course of business, or

A separate structure not attached to your home. Examples could include a garage or a studio.

2. Simplified Option.  If you use the simplified option, you multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. This option does not change the criteria for who may claim a home office deduction.

 

3. Regular Method.  If you use the regular method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.

4. Self-Employed.  If you are self-employed and choose the regular method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You can claim your deduction using either method on Schedule C, Profit or Loss From Business. See the Schedule C instructions for how to report your deduction.

5. Deduction Limit.  If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.

6. Employees.  If you are an employee, you must meet additional rules to claim the deduction. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions.

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IRS Tips to Help People Pay Their Taxes

If you owe tax, the IRS offers safe and easy ways to pay. Check out these payment tips:

• Pay your tax bill.  If you get a bill, you should pay it as soon as you can. You should always try to pay in full to avoid any additional charges. See if you can use your credit card or to get a loan to pay in full. If you can’t pay in full, you’ll save if you pay as much as you can. The more you can pay, the less interest and penalties you will owe for late payment. The IRS offers several payment options on IRS.gov.  

• Change your withholding or estimated tax.  If you are an employee, you can avoid a tax bill by having more taxes withheld from your pay. To do this, file a new Form W-4, Employee’s Withholding Allowance Certificate, with your employer. The IRS Withholding Calculator tool on IRS.gov can help you fill out the form. If you are self-employed you may need to make or change your estimated tax payments. See Form 1040-ES, Estimated Tax for Individuals for learn more.

• Check out an offer in compromise.  An offer in compromise, or OIC, may let you settle your tax debt for less than the full amount you owe. An OIC may be an option if you can’t pay your tax in full. It may also apply if full payment will cause a financial hardship. No everyone qualifies, so make sure you explore all other ways to pay your tax before you submit an OIC to the IRS. Use the OIC Pre-Qualifier tool to see if you qualify. It will also tell you what a reasonable offer might be.

• Check out a direct debit pay plan.  A direct debit pay plan is the lower-cost hassle-free way to pay. The set-up fee is less than other plans – $52 instead of $120. With this type of plan, you pay each month automatically from your bank account. There are no reminder notices from IRS, no missed payments and no checks to write and mail. For more on these rules see the Payment Plans, Installment Agreements page on IRS.gov.

• Get a short-term payment plan.  If you owe more tax than you can pay, you may qualify for more time, up to 120 days, to pay in full. You do not have to pay a user fee to set up a short-term full payment agreement. However, the IRS will charge interest and penalties until you pay in full. It’s easy to apply online at IRS.gov. If you get a bill from the IRS, you may call the phone number listed on it. If you don’t have a bill, call 800-829-1040 for help.

• Use IRS Direct Pay.  The best way to pay your taxes is with IRS Direct Pay. It’s the safe, easy and free way to pay from your checking or savings account. You can pay your tax in just five simple steps in one online session. Just click on the “Payment” tab on IRS.gov.

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From Lemonade Stand to Estimated Taxes

From lemonade stand to estimated taxes

Remember that lemonade stand you started when you were a kid? Things were easier then. Now, if you’re starting a business, you have to remember to give Uncle Sam his due.

When you start a small business, you put all your time and energy into making sure it succeeds; taxes may be the farthest thing from your mind. But there are plenty of tax considerations that go along with your new venture.
We've made a list of some important tax-related issues you need to be aware of as you're getting started and going through your first year.

• Business Structure.  An early choice you need to make is to decide on the type of structure for your business. The most common types are sole proprietor, partnership and corporation. The type of business you choose will determine which tax forms you will file

• Business Taxes.  There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax your business pays depends on the type of business structure you set up. You may need to make estimated tax payments. If you do, use IRS Direct Pay to pay them. It’s the fast, easy and secure way to pay from your checking or savings account.

• Employer Identification Number.  You may need to get an EIN for federal tax purposes. Search “do you need an EIN” on IRS.gov to find out if you need this number. If you do need one, you can apply for it online.

• Accounting Method.  An accounting method is a set of rules that you use to determine when to report income and expenses. You must use a consistent method. The two that are most common are the cash and accrual methods. Under the cash method, you normally report income and deduct expenses in the year that you receive or pay them. Under the accrual method, you generally report income and deduct expenses in the year that you earn or incur them. This is true even if you get the income or pay the expense in a later year.

• Employee Health Care.  The Small Business Health Care Tax Credit helps small businesses and tax-exempt organizations pay for health care coverage they offer their employees. A small employer is eligible for the credit if it has fewer than 25 employees who work full-time, or a combination of full-time and part-time. The maximum credit is 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers, such as charities.

• The employer shared responsibility provisions of the Affordable Care Act affect employers employing at least a certain number of employees (generally 50 full-time employees or a combination of full-time and part-time employees). These employers’ are called applicable large employers. ALEs must either offer minimum essential coverage that is “affordable” and that provides “minimum value” to their full-time employees (and their dependents), or potentially make an employer shared  responsibility payment to the IRS. The vast majority of employers will fall below the ALE threshold number of employees and, therefore, will not be subject to the employer shared responsibility provisions.

Employers also have information reporting responsibilities regarding minimum essential coverage they offer or provide to their fulltime employees.  Employers must send reports to employees and to the IRS on new forms the IRS created for this purpose.

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When Can I Claim Myself As A Dependent On My Tax Return?

A dependent is a person other than the taxpayer or spouse who entitles the taxpayer to claim a dependency exemption.

Each dependency exemption decreases income subject to tax by the exemption amount.

For 2014, the exemption amount is $3,950.

A taxpayer cannot claim a dependency exemption for a person who can be claimed as a dependent on another tax return.

The term "dependent" means a "qualifying child" or a "qualifying relative."

A. To claim a dependency exemption for a qualifying child, all of the qualifying child dependency tests must be met:

• Dependent Taxpayer Test
• Joint Return Test
• Citizen or Resident Test
• Relationship Test
• Age Test
• Residency Test
• Support Test

B. To claim a dependency exemption for a qualifying relative, the person must meet the following tests:

• Dependent Taxpayer Test
• Joint Return Test
• Citizen or Resident Test
• Not a Qualifying Child Test
• Member of Household or Relationship Test
• Gross Income Test
• Support Test

All of the following tests must be met to claim a dependency exemption under the rules for a qualifying child.

Dependent Taxpayer Test — Qualifying Child

If you could be claimed as a dependent by another person, you cannot claim anyone else as a dependent. Even if you have a qualifying child or a qualifying relative, you cannot claim that person as a dependent.

Joint Return Test — Qualifying Child

To meet this test, the child must be:

Unmarried,

Married but does not file a joint return, or

Married and files a joint return only to claim a refund of withheld tax, neither the dependent nor spouse can claim personal exemption on their joint return

Citizen or Resident Test — Qualifying Child

To meet this test, the child must be:

A U.S. citizen or resident or

A resident of Canada or Mexico

Relationship Test — Qualifying Child

To meet this test, the child must be:

Your son, daughter, stepchild, eligible foster child, adopted child, or a descendant (for example, your grandchild) of any of them, or

Your brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant (for example, your niece or nephew) of any of them.

Age Test — Qualifying Child

To meet this test, the child must be:

Under age 19 at the end of the year and younger than you (or your spouse if filing jointly)

A full-time student under age 24 at the end of the year, and younger than you (or your spouse if filing jointly)

Permanently and totally disabled at any time during the year, regardless of age.

Residency Test — Qualifying Child

To meet this test, the child must:

Have lived with you for more than half of the year

Meet one of the exemptions listed below:

Temporary absences — illness, education, business, vacation, or military service

Death or birth of child — a child who was born or died during the year

Support Test — Qualifying Child

To meet this test, the child must:

Not have provided more than half of his or her own support

Note: There are special rules for a child that is the "qualifying child" of more than one person. Do research or get professional advice if you encounter this situation.

Qualifying Relative

All of the following tests must be met to claim a dependency exemption under the rules for a qualifying relative.

Dependent Taxpayer Test — Qualifying Relative

If you could be claimed as a dependent by another person, you cannot claim anyone else as a dependent. Even if you have a qualifying child or qualifying relative, you cannot claim that person as a dependent.

Member of Household or Relationship Tests — Qualifying Relative

Live with you all year as a member of your household,

OR

Be related to you in one of the allowable ways under Relatives who do not have to live with you.

Taxpayers will meet this test for persons

who are relatives, even if the persons are not members of the taxpayer's household for the entire year.

who are not relatives if the persons are members of the taxpayer's household for the entire year.

Member of Household Test — Qualifying Relative

Taxpayers will meet the member of household test for persons who live with them under the following conditions:

The dependent does not have to be related to the taxpayer.

The dependent must live with the taxpayer all year except for temporary absences. (Temporary absences include attending school, taking vacations, and staying in the hospital.)

The relationship between the taxpayer and the dependent must not violate local laws

Relationship Test — Qualifying Relative

Taxpayers will meet the relationship test if their relatives are one of the following:

• child
• parent
• brother/sister
• stepparent
• stepchild
• stepbrother/stepsister
• half brother/half sister
• grandparent
• grandchild
• son-in-law/daughter-in-law
• mother-in-law/father-in-law
• brother-in-law/sister-in-law

If related by blood, relatives also include

• uncle/aunt
• niece/nephew

Tax Tip

Cousins do not meet the relationship test.

Relatives do not have to be members of the taxpayer's household.

Relationships established by marriage are not ended by death or divorce. For example, a daughter-in-law is a relative to her in-law parents even after the death of their son (her husband).

Tax Tip

There are special rules for children born during the year, adopted children, and foster children.

Remember: To claim a dependency exemption, all tests must be met, including either the relationship test or the member of household test.

Joint Return Test — Qualifying Relative

Taxpayers will meet this test for persons who are

unmarried,

married but do not file a joint return, or

married and file a joint return only to claim a refund of withheld tax; neither would have a tax liability on Separate returns; neither the dependent nor spouse can claim personal exemptions on their joint return.

Remember: To claim a dependency exemption, all tests must be met.

Citizen or Resident Test — Qualifying Relative

Taxpayers will meet this test for persons who are, for some part of the year,

U.S. citizens, residents, or nationals or

residents of Canada or Mexico.

Not a qualifying Child Test — Qualifying Relative

A child is not your qualifying relative if the child is your qualifying child or the qualifying child of anyone else.

Gross Income Test — Qualifying Relative

Taxpayers will meet this test for persons whose gross incomes are less than the exemption amount.

In 2014, the exemption amount is $3,950.

Gross Income

is all taxable income in the form of money, property, and services;

includes unemployment compensation and certain scholarships; and

does not include welfare benefits and nontaxable Social Security benefits.

Remember: To claim a dependency exemption, all seven tests must be met.

Support Test — Qualifying Relative

Taxpayers will meet this test if the taxpayer provided more than half of a person's total support for the entire year.

Total support items include

• food
• clothing 
• shelter
• education 
• medical and dental care
• recreation and transportation
• welfare
• food stamps
• housing provided by the state

Compare the dollar value of the support provided by the taxpayer with the total support the person received from all sources.

Tax Tip

There are special rules for dependents who receive support from multiple sources and for children of divorced or separated parents.

Important Point: The gross income test considers the dependent's taxable income. The support test considers all income, taxable and nontaxable.

Remember: To claim a dependency exemption, all seven tests must be met.

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