Not unexpectedly, the Internal Revenue Service (IRS) encourages taxpayers to
get a head start on their tax preparation, especially since early filers avoid
the last minute rush and get their refunds sooner. The first step is to gather
all pertinent records including W-2s, 1098s and 1099s. Equally important is the
process of allocating expenses between business and personal use. This may
include home and automobile expenses as well as expenses for Internet access and
cell phones. Keeping good records makes this task much easier.
Home Office Deduction: Requirements
Generally, expenses related to the maintenance and repair of a personal
residence may not be deducted as business expenses. However, taxpayers who work
at home and use a portion of their home for business purposes may be able to
take a home office deduction. If certain requirements are met, portions of the
real estate taxes, mortgage interest, rent, utilities, insurance, painting,
repairs and depreciation may be deductible as business expenses.
In order to claim a deduction for the business use of a home, taxpayers must
use part of the home either:
- Exclusively and regularly as their principal place of business,
- Exclusively and regularly as a place to meet or deal with patients,
clients or customers in the normal course of their business,
- In connection with their trade or business where there is a separate
structure not attached to the home,
- On a regular basis for certain storage use such as inventory or product
samples,
- As rental property, or
- As a home daycare facility.
“Exclusive use” means a specific room or separately identifiable area of the
home is used only for trade or business. Example: An attorney uses the den in
his home to write legal briefs or prepare clients’ tax returns. The family also
uses the den for recreation. The den is not used exclusively in the attorney’s
profession, so a business deduction cannot be claimed for its use.
“Regular use” means the area is used regularly for trade or business.
Incidental or occasional business use is not regular use.
These requirements are discussed in greater detail in IRS Publication 587,
Business Use of Your Home, online at
www.irs.gov/pub/irs-pdf/p587.pdf.
Business Use of Car
If a car is used only for a job or business, the entire cost of operation
(subject to certain limits) may be deducted as a business expense. However, if
the car is used for both business and personal purposes, only the cost of its
business use may be deducted.
Deductible automobile expenses may be computed using the standard mileage
rate method or the actual expense method. The current standard mileage rate may
be found in IRS Publication 463, Travel, Entertainment, Gift and Car Expenses,
online at
www.irs.gov/publications/p463/index.html. When the standard mileage rate is
used, any parking fees and tolls incurred for business purposes may be added to
the deduction.
To use the standard mileage rate for an owned car, it must be used in the
first year the car is available for business use. Then, in later years, the
taxpayer can choose to use the standard mileage rate or actual expenses. For a
leased car, the taxpayer must use the standard mileage rate method for the
entire lease period. Other conditions relative to depreciation and number and
use of vehicles must also be met.
To use the actual expense method, a taxpayer must determine what it actually
costs to operate the car for business purposes, including gas, oil, repairs,
tires, insurance, registration fees, licenses, and depreciation (or lease
payments) attributable to business miles driven.
Other car expenses for parking fees and tolls attributable to business use
are separately deductible, regardless if the standard mileage rate or actual
expenses are used. If a taxpayer qualifies to use both methods, he or she may
want to figure the deduction both ways to see which gives a larger deduction.
Residential Energy Efficiency Credits
Homeowners can purchase energy efficient items such as insulation or storm
windows that will improve the energy efficiency of their homes and will qualify
for a tax credit if certain energy efficiency requirements are met. These items
must be placed in service after Dec. 31, 2005 and before Jan. 1, 2008.
The law provides a ten percent (10 %) credit for buying qualified energy
efficiency improvements. To qualify, a component must meet or exceed the
criteria established by the 2000 International Energy Conservation Code and must
be installed in the taxpayer’s main home within the United States.
The following items are eligible:
- Insulation systems that reduce heat loss/gain
- Exterior windows (including skylights)
- Exterior doors
- Metal roofs (meeting applicable Energy Star requirements).
In addition, the law provides a credit for costs relating to other
residential energy efficiency expenses. The following credits are available:
- $50 for each advanced main air circulating fan
- $150 for each qualified natural gas, propane, or oil furnace or hot
water boiler
- $300 for each item of qualified energy efficient property.
The maximum credit for all taxable years is $500 and no more than $200 of the
credit can be attributable to expenses for windows.
A credit is also available for qualified solar panels, solar water heating
equipment, or a fuel cell power plant added to a home. Taxpayers are allowed one
credit equal to 30 percent of the qualified investment in a solar panel up to a
maximum credit of $2,000, and another equivalent credit for investing in a solar
water heating system, but no part of either system can be used to heat a pool or
hot tub. Additionally, taxpayers are also allowed a 30 percent tax credit for
the purchase of qualified fuel cell power plants. The credit may not exceed $500
for each .5 kilowatt of capacity.
For more information, see Form 5695 – Residential Energy Credits
(2006) (with instructions) online at
www.irs.gov/pub/irs-pdf/f5695.pdf.
When It’s Tax Return Time
Get the right forms. They’re available around the clock on the IRS Web
site.
Take your time. Don’t forget to leave room for a coffee break when
filling out your tax return as rushing can mean making a mistake.
Double-check your math and verify all Social Security numbers. These
are among the most common errors found on tax returns. Taking care will reduce
your chance of hearing from the IRS and speed up your refund.
Get the fastest refund. When you file early, you receive your refund
faster. When you choose direct deposit, you receive your refund sooner than
waiting for a check.
E-filing is easy. E-filing catches math problems, provides
confirmation your return has been received and gives you a faster refund.
Don’t panic. If you have a problem or a question, remember the IRS is
there to help. Try the IRS Web site at www.IRS.gov or call the IRS customer
service number at (800) 829-1040.
- Where’s My Refund? Once taxpayers file their tax return, they can track
their refund through the online tool “Where’s My Refund?” at
www.irs.ustreas.gov/individuals/article/0,,id=96596,00.html. Access this
secure Web site to find out if the IRS has processed the tax return and sent
the refund. Taxpayers need some of the exact information from their tax return
in order to use the tool.
Published: 2/13/2007
