Business Use of the Home: New Option for 2013

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Many self-employed taxpayers work from home.  But not all of them can deduct expenses for the “business use of their home.”  The tax worksheet (Form 8829) may be only one page long, but it’s 43 lines of mind-numbing detail (at least for one more year) that you are better off skipping if you see that you don’t meet the threshhold requirements.

In order to qualify for the “business use of the home” deduction, there must be a section (or sections) of your home which you use exclusively and regularly as your principle place of business.  The deduction amount is based on square footage dedicated to this purpose. Therefore, no matter how often you find yourself on your laptop in that 3′ x 3′ area of your mancave occupied by the Lazyboy, if you ocassionally flip on the TV from that same spot, or host superbowl parties or such, you cannot satisfy the “exclusivity” prong of the test.

The good news is the IRS recently announced a new simplified option for “business use of the home” that will apply to 2013 taxes (during the 2014 filing season).  Taxpayers will be able to opt for a straight $5.00 per square food deduction (capped at $1,500 per year) instead of stressing over dreaded Form 8829.  It is believed that more taxapayers will take advantage of the tax relief afforded by this deduction and will save taxpayers something like 1.6 million hours of work and recordkeeping annually.  However, the basic exclusivity requirments explained above will remain in place.

IRS Inflation Adjustments

This blog post lists some of the Annual Inflation Adjustments published by the IRS today that are interesting not only  to CPAs and tax attorneys. It may be helpful to understand that the 2012 “tax year” was last year (for taxes filed in 2013). But the 2012 tax season is right now (well, actually between January 30th and April 15th 2013). So, we will not be required to file for tax year 2013 until the 2014 tax season. The terminology gets a little confusing.

Adjustments for Tax Year 2012:

  • standard deduction increased to $6,100 (was $5,950)
  • personal exemption increased to $3,900 (was $3,800)
  • maximum Earned Income Credit amount increased to $6,044 (was $5,891)

Adjustments for Tax Year 2013:

  • new tax rate of 39.6 percent added for individuals whose income exceeds $400,000
  • personal exemption subject to a phase-out that begins with adjusted gross incomes of $150,000
  • the Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 (was $50,600)

Make note of these changes because lawmakers may one day be purging the tax code of all deductions, exemptions, credits, and anything else that resembles tax relief.

IRS Tips: Charitable Contributions

Assuming anybody has any money to give this year, the IRS offers the following advice on claiming deductions for charitable giving:

  • If you want the deduction count on your 2011 taxes, then you have to make the contribution before the end of the year.
  • The organization you donate to must be a qualified organization — confirm using IRS Publication 78.
  • Charitable contributions are only deductible if you itemize, not if you take the standard deduction.
  • Keep good records and save donation receipts.
  • You may need to complete Form 8283 for non-cash contributions

As always, the best, most comprehensive source of information is the IRS publication on the topic.  For more information related to charitable contributions, see Publication 526 (available on the IRS website).