Tax deductions - regarding your home
Those who are self-employed or are planning to start a business
from their home should make full use of the provisions made
under the different home business tax deduction heads. These
deductions include:
1. Home Office: A home office is that part of the house, which
you use solely for your business functions. You can benefit from
the home office deduction if you use this office regularly and
exclusively for business. Indirect expenses and depreciation too
can be deducted.
2. Car: If you use a car to carry out your business then you can
deduct the business cost of the car. You can also deduct the
operating and maintaining expenses of the car. The deduction can
be based on actual costs or the IRS mileage rate, whichever is
more beneficial to you.
3. Personal assets: You can claim a deduction on personal
assets, like computers, that you use in running your business.
You, however, have to qualify the percentage of use.
4. Business Journeys: Costs incurred on air tickets, hotels,
internal transportation, shipping and even tipping are tax
deductible. When it comes to meals though, you can deduct only
half the total amount. The travel expenses of an employer,
client or partner are also deductible.
5. Gifts and Entertainment: Being in a business is almost
synonymous with having to entertain your clients and customers.
Fortunately, 50% of your business-entertainment expense,
inclusive of meals and tickets, are tax deductible. Often you
may have to lavish gifts on important clients, and in this case
the entire cost of the gift is deductible.
6. Retirement: The payments you make when saving for your
retirement are deductible from your personal income tax. Thus it
follows that the dollars you spend for your retirement plan grow
tax free in your business until you retire.
7. Family Connections: Hiring your children as legal employees
in your business can allow you to transfer funds in their name.
And since children fall in a lower tax bracket they may not have
any tax liability. However, only eight-year-olds and above can
be hired. Also, the work allocated to them should be such that
they can perform it without physical or mental strain. Similarly
you can hire your parents as employees thus saving the dollars
you spend on taking care of them.
8. Social Security: As a self-employed worker, you have to pay
double the social security contribution. Fortunately, half of
this contribution is tax deductible in the 1040 form.
Home improvement tax deductions
When it comes to home improvement tax deduction it is important
to make a distinction between home repair and home improvement.
This is because home improvement qualifies for tax rebates but
home repair does not.
But before you debate whether to spend on home improvement or
not, it may be a good idea to know what constitutes home
improvement. Home improvement is any addition that adds to the
life and quality of your house. This would include adding a
fence, driveway, new room, swimming pool, garage, porch or deck,
insulation, new heating/cooling systems, a new roof or
landscaping. You can consider this as a capital expense.
Now let's consider home repair. Home repair is decidedly
different from home improvement. It is something you do to
arrest the decay of your property. Repairs remedy an ill. You
cannot therefore use this expenditure to get a tax benefit.
What constitutes home repair? Repainting, any sort of fixing,
repairing leaks, and replacing broken fixtures constitute home
repairs. There is a clause here, however, which says that if you
were remodeling your house, that is doing a whole lot of things
to improve it, and if you were to simultaneously carry out some
repair alongside, then it is possible to show the whole thing as
home improvement. In effect the next time you want to add a room
to the house, remember to repair that leaking roof too!
A god time to go for home improvement is when there is a drop in
the interest rates. This is the time when you too can go in for
refinancing to get the benefits of the lower rates. If you do so
and use the proceeds of your new mortgage to finance a home
improvement spree then, you can deduct the loan points in the
year you refinance. If you do not use the proceeds of a
refinance to improve your house, the points are deducted over
the life of the loan.
On the other hand, if you use only a portion of the loan you
have taken, then the deduction is proportional. The remainder is
deducted over the life of the mortgage. You must also remember
that points which are not deducted by the year the loan is paid
off are usually cent percent deductible in the payoff year.
So in case you want to improve your home, do so by all
means...just know what you can deduct and what you cannot. It
will be in your interest.