Tag: income tax return

Posted on by Jan Roberg

Last Minute Tax Tip: Pay Up Your Alimony Now

Let’s face it, divorce sucks and paying alimony is even worse. But if you have an arrangement where you are supposed to be paying alimony (and I mean alimony, not child support) it’s to your advantage to pay up for the year before December 31. Here’s why:

Money that is paid out as alimony is a tax deduction for you. (And, if it’s any consolation, it’s taxable to your ex.) Child support, on the other hand, gives you no tax deduction and your ex pays no income tax on it.

Alimony is considered to be an “above the line” deduction. That means it lowers your adjusted gross income. Now that sounds like a lot of accounting jibberish, but on your tax return, it’s valuable. It can make the difference between whether or not you qualify for other deductions or tax credits. Made simple: above the line deductions are good.

Now here is the really important part: if you pay both alimony and child support, and you’ve missed some payments, then whatever payments you have made get counted as being child support first, and alimony second. Okay, in plain English: Let’s say you’re supposed to pay $100 a month for alimony and $200 a month for child support. $300 a month total. (Okay, that must sound like a fantasy but I like easy numbers.) Anyway, suppose you were good all the way up through September at paying $300 a month but then something happened and you didn’t make any payments from October through December.

For those first nine months you paid a total of $2,700. In your mind you paid $900 in alimony and $1800 in child support, right? Except that’s not how the IRS sees it. To them you paid $2,400 in child support and $300 in alimony, because for tax purposes you pay the child support first. So with the money that you did pay, you don’t get your full deduction. And let’s be real here, we’re probably talking about bigger numbers in real life. This tax deduction can really make a difference.

Bottom line: if you want to claim your full alimony deduction, all of your alimony and child support for the year must be paid in full by December 31st.

Posted on by Jan Roberg

When Should I Do My Own Taxes?

I often hear the question, “When should a person do his/her own tax return?” Now nobody ever asks me that directly, as a professional preparer you’d think I’d say, “Always!” And yeah, that’s pretty much my general answer. But let’s face it, right now money is tight for everyone and if you can keep more of your money in your pocket by doing something yourself, maybe you should.

Here’s a clue: How long does it take for someone to do your taxes for you? I was reading in the paper today about a guy who whipped out tax returns for clients at an average rate of 15 minutes per return. If your preparer can finish your return in 15 minutes, that’s not tax preparation–that’s data entry. If you’ve just got a simple data entry type return, then you can probably do it yourself for free online.

Here’s an example: Peggy is a single person living in Missouri making $35,000 a year (roughly the median income for a single person her age.) Working a regular wage earning job, she’ll have $2,170 taken out for social security and $508 taken out for medicare taxes. Her federal income tax for the year will be $3,434 and her state income tax will be $1,225. So, for the year, she’s paying $7,337 in income related taxes alone. That’s almost 21% of her income.

If you’re going to spend 20% or more of your annual income on something, don’t you think it deserves more than 15 minutes of attention? If I were doing Peggy’s taxes, we’d be talking about her plans–does she want to buy a house? get married? go back to school? save for retirement? etc. We’d also talk about her job, what kind of benefits are available, is she taking advantage of those programs, etc. We’d also be talking about any ways that might be available for Peggy to reduce paying 21% of her income towards taxes.

It’s quite possible that there’s nothing there for Peggy. There are no possible deductions for her, she doesn’t care about retirement, she just wants her taxes to be filed and be done with it. Mr. 15 Minutes is good enough for her. In that case, why pay him when she can do it herself? Peggy would be a prime candidate for doing her own taxes.

Twenty percent of your income deserves more than 15 minutes of thought. If you’re going to a 15 Minute Man, that’s all you’ll get and you really would be better off doing it yourself.

Posted on by Jan Roberg

Can You Claim a Home Office Deduction?

 For many people who own their own business, claiming a home office is a great tax deduction.  Some people who work for employers can also claim a home office, but they must also meet the requirement that it’s for the benefit of the employer. What about you?  Should a home office deduction be on your tax return this year?

 The first criteria for a home office is “regular and exclusive”.  This basically means that you have a defined space that is only used for business.  It doesn’t mean you have to have four walls, your defined space can be a section of another room.  For example, let’s say you have a desk in your bedroom that you do your office work out of.  You make your business calls there, the computer is there, it’s your business headquarters.  Your bedroom can’t be your home office, but that corner of your bedroom certainly is.  Many people think that since they don’t have a dedicated room to call an office that the home office deduction isn’t available to them.  That’s not true.  Let’s say that this guy’s bedroom is 12×14 feet.  His office space is basically his desk, his chair and a file cabinet that takes up about 5×8 feet.  His home office space is 40 square feet.  Granted, that’s not much of an office, but it’s still going to help reduce his taxes and that’s the whole point isn’t it?.

 Let’s go back to the “exclusive” use idea again.  Let’s say you’re using your kitchen table for you office.  (To be honest, it’s my favorite place to work.)  The problem is, because its the kitchen table, it doesn’t qualify as exclusive use.  Come five o’clock (at least at my house) I clean the table off and get ready for dinner.  I actually have another spot in the house that I do claim as my home office, and I really do work up there.  It doesn’t mean I never work at the kitchen table, it just means that I don’t claim the kitchen as my home office. 

 The concept of office space as a function of business is changing.  How many people do you know would say their office is at Starbucks?  The cab of their truck?  Wherever their Blackberry is?  (The IRS doesn’t yet allow Starbucks receipts to be claimed as office rent expense, but I wish they did.)  For many people, these places really are their offices, but they still need a place where they can regularly store paperwork and/or product and receive mail. Starbucks may seam like your main office, but I would argue that you could also claim a home office deduction if you made space for it. 

 Now if you actually meet clients in your home, the home office deduction is almost a gimme.  Also, if your home has a separate structure where you do business, that’s pretty much guaranteed. Qualified daycare providers have special rules for claiming the home office deduction, but they definitely are able to claim a portion of the home expenses against their business income. 

 So what home office claims are going to get denied?  Well, one example that didn’t work was a woman who had a party plan business.  Every week she was hosting parties in her home for 10-20 couples selling her product.  She had claimed her whole house as a home office business deduction because the guests had full run of her house during the weekly parties.  Right about now you may be wondering, “what the heck was she selling anyway?”  Pretty mundane stuff actually.  If you’re selling a home party product like Avon, or Pampered Chef, you can claim a home office deduction for the storage of your product.  You can also claim office space for your administrative duties.  I would even go so far as to say you could claim an area of your home if you used it exclusively for your home parties on a regular basis like this woman did.  But, claiming your whole house (including your kid’s bedrooms, your bedroom, your kitchen, your personal bathroom) …that’s not going to fly. 

 Many people are afraid that a home office deduction guarantees an audit.  That’s not the case.  But, there are trip points that will make the IRS look closer at your return like claiming the whole house in the example above. Be sure to have a professional prepare, or at least review, your return when you claim a home office.  The money you spend up front will be well worth it in the time and taxes saved.