Search Results for: actual expense

Before filing your taxes, consider whether you should itemize your deductions or take the standard deduction.

The standard deduction reduces your income by a certain amount, while itemized deductions consist of a list of permissible charges. You can claim whichever is the most advantageous.

Standard Deduction

If you make the standard deduction claim, the IRS bases the standard deduction on your filing status and assigns a fixed amount to it. The standard deduction amounts for 2022 tax returns (filed in 2023) are:

• $12,950 for single taxpayers and married individuals filing separate returns
• $19,400 for heads of household
• $25,900 for married couples filing jointly or qualifying surviving spouse

Itemized Deductions

If you itemize your deductions, you can claim amounts you actually spend on certain deductible expenses such as:

• unreimbursed medical and dental expenses that exceed 7.5% of Adjusted Gross Income
• allowable taxes up to $10,000, for example:
  • property and some personal taxes
  • state and local income taxes
  • foreign income tax
• mortgage interest (reported by bank to you on form 1098):
  • has to be for main or second home
  • the taxpayer main or second home must secure the debt generating the interest
  • the debt proceeds must be used to buy, build, or substantially improve main home or second home
  • the accumulated debt is limited to $750,000
• personal casualty and theft losses from a federally declared disaster area
• donations to a qualified charity (up to 60% of Adjusted Gross Income)

 If you choose to itemize, you must include Schedule A with your tax return and list all of these expenses on it.

Advantages on choosing the standard deduction

• IRS does not require to keep records of your expenses or keep track of supporting documents such as bank statements, medical bills, tax forms, etc.
• The standard deduction has increased significantly compared to a few years ago and the IRS updates this amount for inflation every year
• Taxpayers aged 65 or older or blind can claim higher standard deductions:
  • the deduction is increased by $1,750 for single taxpayer or head of household
  • $1,400 for married filing jointly
  • if you are both 65 and blind, the additional deduction is doubled

Disadvantages on choosing the standard deduction

• The IRS does not allow you to use the standard deduction if you are married filing separately and your spouse uses the itemized deductions because you and your spouse must be on the same page when choosing the deductions
• In addition, if someone can claim you as a dependent, your standard deduction will be lower
• You could pay more in taxes when you choose to take the standard deduction instead of the itemized deductions, if your itemized deductions amount exceeds the standard deduction amount

Advantages on choosing the itemized deductions

• You could save some money: if your itemized deductions are higher than the standard deduction, your tax bill will be lower
• Your tax bill will change if you itemize even slightly more deductions than the standard deduction:
  • let’s suppose you are filling single, and you have $14,450 in itemized deductions
  • although it is $1,500 more than the standard deduction, which is $12,950 for single taxpayers, you won’t actually pay $1,500 les in taxes
  • always keep in mind that the deductions are deducted from your taxable income
  • and, in this case, itemizing deductions resulted in a $1,500 reduction in your taxable income, not in your tax due

Disadvantages on choosing the itemized deductions

• You have to keep receipts, bank statements and other documentation
  • for example, for cash charitable contributions IRS requires you to have:
  • if the contribution is less than $250:
    • bank records such as:
      • canceled check
      • bank statement
      • credit card statement
    • a document showing: date, amount of the contribution, and the organization name
    • receipt with date, contribution amount, and organization name
    • payroll record, if made by payroll deduction
  • if the contribution is $250 or more:
    • same as above, plus either payroll record or a written acknowledgement from the organization showing:
      • date and amount of contribution
      • if any goods or services, other than intangible religious benefits were provided by the organization and a good faith estimate of their value
      • a statement that the only benefit the taxpayer received was an intangible religious benefit (if applicable)
• The filing is more challenging because you will have to file a Schedule A and possibly other tax form

The tax filing deadline of April 18, 2023, is quickly coming during tax season 2023. The sooner you begin to prepare for the tax season, the better.

We recommend you keep your documents, such as interest statements, bank statements, receipts, 1099 forms, W-2 forms, and other documents in a secure location and properly organized, preferably in electronic format. For example, if you scan a receipt you can save the pdf file with a name such as
year/month/date/, vendor name and the amount. And you can create separate folders for each year.

If you need help with your federal or state taxes, give us a call or schedule an appointment.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

 

To make your income-tax planning more effective, you should have a clear picture of your current tax situation. This means knowing what your taxable income was last year and what it is estimated to be in the following year.

Generally, you are required to report and pay taxes on all income that derives from your labor or capital. This applies to income received in any form (e.g., cash, services, meals, stock, property, etc.). However, certain types of income are tax exempt. The following lists include the most common items in both the taxable and nontaxable categories.

Forms of Taxable Income

• Wages, salary, fees, tips, commissions, or business profits
• Gains received from dealings in real estate, securities, and other property
• Dividends
• Rents
• Alimony and separate maintenance payments that the payer can deduct
• Royalties
• Income from your share of an estate or trust, aside from gifts or bequests
• Annuities and pensions
• Certain fringe benefits
• Prizes and awards
• Some legal settlements proceeds
• Up to 85% of your Social Security benefits, depending on the amount of your other income.
• Accrued interest earned but not actually received (for example, accrued interest earned on a zero-coupon bond held in a taxable account or accrued interest earned on U.S. Treasury inflation-protected securities (tips))

Forms of Nontaxable Income

• Interest earned from state, tribal, and municipal bonds and mutual funds that own such bond
• Gifts and inheritances
• Expense reimbursements received from your employer
• Returns of capital such as loan principal repayments and the portion of annuity and pension payments that represent a return of your original investment upon which you have already paid taxes
• Home sale gains up to $250,000 for single homeowners and $500,000 for married homeowners filing jointly
• Scholarships, as long as you satisfy some conditions

These lists are not all-inclusive. You can find more information on the IRS website.

Contact us today with any questions.

IRS rules and exceptions abound, but there are some questions we can answer simply.

Next to your home, your car is probably the most expensive investment you make. And the costs of paying for and maintaining it can be considerable. Can you recoup some of your investment by claiming vehicle expenses on your tax return?

Sometimes. The IRS has many restrictions on the business use of a vehicle, and those restrictions have many exceptions. Better to know these upfront than to have to correct a tax return after you’ve filed it. Here are some questions and answers that may help you decide whether you’re eligible.

How does the IRS identify a “business vehicle”?

A car, van, pickup, or panel truck.

What are transportation expenses?

These are “ordinary and necessary expenses” incurred when you, for example:

• Visit customers,
• Attend a business meeting held at a location other than your regular workplace, or
• Go from home to a temporary workplace that is not your company’s principal location.

The daily commute to and from your regular office is not deductible. The IRS considers this personal commuting expenses.

What if I’m on an overnight business trip away from home?

The IRS considers these travel expenses, and they’re reported differently. Your car expense deduction, though, is calculated the same way in both situations.

What if I use my car for both business and personal purposes?

You’ll calculate the expenses incurred for each by determining how many miles you drive for business and how many you drive for personal reasons.

I work in a home office. Can I deduct any driving expenses?

Yes, you can deduct the cost of driving to “another work location in the same trade or business.”

How do I calculate my deductible expenses?

There are two options. You can choose between the standard mileage rate and actual car expenses – depreciation, oil and gas, insurance, and repairs.

Depreciation? Isn’t that difficult to calculate?

Yes, especially for cars. If you plan to take this kind of deduction, please let us handle your tax preparation for you. Depreciation is very, very complex, and sometimes requires more than one calculation method.

What kind of business vehicle expense records do I need to maintain?

You know the drill here. If the IRS ever wants to examine your return, it will expect evidence like receipts, cancelled checks, and credit card statements. You’ll need to document the date and location where you incurred the expense. You’ll need accurate mileage records (miles driven, purpose of trip, etc.).

These requirements scream for some kind of organized computer log or written diary, along with a safe place for any paper receipts, bills, etc. There are numerous mobile apps that can help you with this task. We can steer you in the right direction.

If you’re planning to deduct car expenses, it’s important that you keep careful paper or electronic records.

Where will I be reporting transportation expenses?

If you are self-employed, you will report business-related vehicle expenses on Schedule C or Schedule C-EZ (Form 1040). Farmers should use Schedule F (Form 1040). You’ll also want to complete a Form 4562, which is used to report depreciation and the Section 179 deduction.

Maintaining accurate records for car and truck expenses is time consuming and detail intensive. And that’s once you understand all of the IRS’s rules and exceptions surrounding this deduction. To avoid having to fix completed tax documents that the IRS has questioned, talk to us before you put a vehicle into business use. We’ll be happy to evaluate your transportation situation and guide you through the process.