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Qualifying for the Home Office Deduction

Qualifying for the Home Office Deduction

Working from home can certainly provide you with personal benefits, such as a flexible schedule and more family time. But increasing numbers of people are discovering the tax advantages as well. It’s no secret that you generally can’t deduct certain personal expenses on your federal income tax return. These include, homeowners insurance, utilities, and home repairs, etc. But, if you’re using part of your home as a home office, you may be able to write off part of these expenses. To qualify for the home office deduction, you must first understand the IRS requirements.

The home office deduction is really a group of deductions

First of all, what is a home office? A home office is a room in your home, a portion of a room in your home, or a separate building next to your home that you use exclusively and regularly to conduct business activities.

This definition is important, because you may be able to deduct part of your housing expenses on your federal income tax return if you have a home office. This could include rent, utilities, and insurance. This deduction (or group of deductions) is known as a home office deduction. To take the deduction, you’ll need to file Form 8829 with the IRS. To even consider the home office deduction, though, your at-home business activities must involve a trade or business. Unfortunately, a hobby won’t do.

Now let’s consider the IRS requirements. To qualify for a home office deduction, you must meet two threshold tests. These are the place of business test, and the regular and exclusive use test.

The place of business test is somewhat flexible

To pass this test, you must show that you use part of your home as:

  • The principal place of business for your trade or business, or
  • A place where you regularly meet with clients, customers, or patients

In some cases, you can also meet the principal place of business requirement if you conduct substantial administrative and management tasks for your outside business at home. And, you have no other fixed location where you conduct these activities. These tasks might include billing customers, keeping books and records, ordering supplies, setting up appointments, or writing reports.

For example, assume you’re a doctor at a local HMO who’s been given examination space but no office space. You use a room in your home regularly and exclusively to correspond with insurance companies, bill patients, and read medical journals. You have no other fixed location for conducting these types of activities. In such a case, your space would likely pass the place of business test for a home office deduction.

What if your home office is in a separate structure next to your home, like a shed or garage? In such a case, that needn’t be your principal place of business. However, you must use that office regularly and exclusively in connection with your trade or business. Be sure you use this structure only for business purposes–you can’t store your car there.

You must also meet the regular and exclusive use test

In general, you must also pass the regular and exclusive use test before you can take a home office deduction. Exceptions apply for taxpayers who run day-care facilities from home and for sellers who use part of their homes for storing inventory. As you might expect, this test requires you to show that you exclusively use a portion of your home for business purposes on a regular basis.

For example, assume you set aside one room in your home as your home office. You also use this room as a playroom for your children. Here, you wouldn’t meet the exclusive use test. Now assume that you use one room in your home exclusively for your side business of selling insurance. You engage in this business only occasionally. Because you don’t use the office on a regular basis, you still won’t qualify for the home office deduction.

Telecommuters might also qualify for the home office deduction

If you telecommute or are an employee who works at home, you may also qualify for the home office deduction. You’d have to meet the above requirements. In addition, though, your home office must be for the convenience of your employer. In plain English, this means that your employer must ask you to work out of your home. The arrangement must serve your employer’s business needs, not vice versa.

The home office deduction for an employee who works at home is taken as a miscellaneous itemized deduction on Schedule A of Federal Form 1040. This deduction is subject to the 2 percent limit for miscellaneous itemized deductions.

If you qualify for the deduction, you can deduct all direct expenses and part of your indirect expenses

You can deduct both your direct and indirect expenses regarding your home office. Direct expenses are costs that apply only to your home office. You can deduct these costs in full against your business income. Some examples include the cost of a business telephone line and the cost of painting your home office. However, no deduction is allowed for basic local telephone charges on the first line in your home, even if that line is used for the home office.

Indirect expenses are costs that benefit your entire home. You can deduct only the business portion of your indirect expenses. Some examples of indirect costs include rent, deductible mortgage interest, real estate taxes, and homeowners insurance. The business percentage of your home is determined by dividing the area exclusively used for business by the total area of the home. For example, assume your home is 2,000 square feet and your home office is 200 square feet. Your business percentage is 10 percent (200 divided by 2,000). In such a case, if you rent your home, you can deduct 10 percent of your rent as part of your home office deduction.

Even if you don’t qualify for the home office deduction and are unable to deduct home-related expenses (e.g., homeowners insurance), you can still take a deduction for your regular business expenses, such as the purchase of file cabinets, business equipment, and supplies.

Some of your home office expenses may be limited

If the gross income from your business (the one associated with the home office) equals or exceeds your regular business expenses (including depreciation), all expenses for the business use of your home can be deducted. But if your gross income is less than your total business expenses, certain expense deductions for the business use of your home are limited. The deduction isn’t lost forever, though. It’s simply carried forward to the next year.

Can you spell “audit”?

Historically, the IRS has closely scrutinized home office deductions. Here are some steps you can take to substantiate the existence of your home office:

  • Use your home address on your business cards, stationery, and advertisements
  • Install a separate telephone line for your business
  • Instruct clients or customers to visit your home office, and keep a log of those visits
  • Log the dates, hours spent, and type of work performed in your home office
  • Have business mail sent to your home

Having a home office can be a factor when you sell your home

Unless you’re careful, deductions today can cost you money when you sell your home. Homeowners who meet all requirements can generally exclude from federal income tax up to $250,000 of capital gain. This can be up to $500,000 if you’re married and file a joint return, when a principal residence is sold. You may end up paying some taxes, though, if you have a home office.

When you sell your principal residence, an amount of capital gain equal to certain depreciation deductions you were entitled to (as a result of having your home office) won’t qualify for the exclusion. Specifically, the exclusion won’t cover an amount equal to depreciation deductions attributable to the business use of your home after May 6, 1997.

Note: In addition, where the business portion of the home is separate from the dwelling unit (e.g., an office in a converted detached garage) any capital gain on the sale of the house has to be apportioned. Only the part of the gain allocable to the residential portion is eligible for exclusion.

For example, assume a self-employed accountant bought a home in 1998 and sells the home several years later at a $20,000 gain. Although the house was always used as his principal residence, the accountant used one room within the house as his business office. Over the years, the accountant claimed $2,000 of depreciation deductions for his office. Under IRS regulations, $18,000 of the capital gain will be tax free. Only the $2,000 of the gain equal to the depreciation deductions will be taxable.

If the accountant’s office had been located in a converted detached garage on his property, he would have to treat the sale as two separate transactions and pay tax on any gain allocable to the converted garage.

Because this area is complex, you should consult a tax professional. Also, you might want to read IRS Publication 587, Business Use of Your Home.

Home office safe harbor calculation available

The home office safe harbor deduction is a simplified way to claim a home office deduction. This option does not change the criteria for who may claim a home office deduction.The safe harbor doesn’t change the requirements for claiming the deduction, it simply changes the way the deduction is calculated. Instead of determining and allocating actual expenses, under the safe harbor method you calculate the home office deduction by multiplying the square footage of the home office (up to a maximum of 300 square feet) by $5. Since square footage is capped at 300, the maximum deduction available under the safe harbor method is $1,500. You cannot use the safe harbor method if you are an employee with a home office if you receive advances, allowances, or reimbursements for expenses related to the business use of your home under an expense or reimbursement allowance with your employer.

Each year, you can choose whether to use the safe harbor method of calculating the deduction or to use actual expenses. There are two things to keep in mind, though:

  • If you use the safe harbor method in one year, and in a later year use actual expenses, special rules will apply in calculating depreciation
  • If you are carrying forward an unused deduction (because your business deduction exceeded your business income in a prior year), you will not be able to claim the deduction in any year in which you use the safe harbor method–you’ll have to wait for the next year you use actual expenses to claim the unused deduction

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Understanding Child Tax Credit and the Child and Dependent Care Tax Credit

Understanding Child Tax Credit and the Child and Dependent Care Tax Credit

Let’s face it, childcare and dependent costs have risen exponentially across the United States. The Child Tax Credit and Child and Dependent Care Tax Credit is a federal tax benefit that plays a substantial role in providing financial support for taxpayers with children and dependents with disabilities. This credit allows qualified taxpayers to lessen their tax liability by a certain percentage of the qualified expenses acquired for the care of their children or dependents. We will explain the differences between the two credits, and how they can help reduce your tax liabilities based on eligibility requirements.

Child Tax Credit

The intent of this credit is simply to provide tax relief for parents, working or not, who have qualifying children under the age of 17. A qualifying child may be a dependent child, stepchild, adopted child, sibling, or stepsibling (or descendant of these individuals), or an eligible foster child.

To be a qualifying child for the 2023 tax year, your dependent generally must:

  • Be under age 17 at the end of the year
  • Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (for example, a grandchild, niece or nephew)
  • Provide no more than half of their own financial support during the year
  • Have lived with you for more than half the year
  • Be properly claimed as your dependent on your tax return
  • Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid
  • Have been a U.S. citizen, U.S. national or U.S. resident alien

For 2023, if you are qualified, the child tax credit is worth $2,000 per qualifying dependent child if your modified adjusted gross income (MAGI) is $400,000 or below (married filing jointly) or $200,000 or below (all other filers). The refundable portion, also known as the additional child tax credit, is worth up to $1,600. To determine whether you’re eligible to claim the Additional Child Tax Credit, you can fill out the Child Tax Credit Worksheet included in the Form 1040 instructions.

If your MAGI exceeds the above limits, your credit gets reduced by $50 for each $1,000 that your income exceeds the threshold.

Child and Dependent Care Tax Credit

The other credit–the child and dependent care tax credit–offers alleviation to working people who must pay someone to care for their children or other dependents. For tax year 2023, the maximum amount of care expenses you’re allowed to claim is $3,000 for one person, or $6,000 for two or more people. The percentage of your qualified expenses that you can claim ranges from 20% to 35%. See below for more detailed requirements:

To be a qualifying child for the 2023 tax year, your dependent generally must:

  • Be under age 17 at the end of the year
  • Be your son, daughter, stepchild, eligible foster child, brother, sister, stepbrother, stepsister, half-brother, half-sister, or a descendant of one of these (for example, a grandchild, niece or nephew)
  • Provide no more than half of their own financial support during the year
  • Have lived with you for more than half the year
  • Be properly claimed as your dependent on your tax return
  • Not file a joint return with their spouse for the tax year or file it only to claim a refund of withheld income tax or estimated tax paid
  • Have been a U.S. citizen, U.S. national or U.S. resident alien

You qualify for the full amount of the 2023 Child Tax Credit for each qualifying child if you meet all eligibility factors and your annual income is not more than $200,000 ($400,000 if filing a joint return).

Parents and guardians with higher incomes may be eligible to claim a partial credit.

For married persons to qualify for the credit, both spouses must work outside the home, or one must work outside the home while the other is a full-time student, is disabled, or is looking for work (provided that the spouse looking for work has earnings during the year). Married couples must also file a joint income tax return. The credit is also available if you’re a single parent or a divorced custodial parent. For more information, visit IRS for more tax credit information.

sources: IRS.Gov
Turbotax.com

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Choosing an Income Tax Filing Status

Choosing an Income Tax Filing Status

Selecting a filing status is one of the first decisions you’ll make when you fill out your federal income tax return, so it’s important to know the rules. And because you may have more than one option, you need to know the advantages and disadvantages of each. Making the right decision about your filing status can save money and prevent problems with the IRS down the road.

The four filing statuses and how they affect your tax liability

Your filing status is especially important because it determines, in part, the tax rate applied to your taxable income, the amount of your standard deduction, and the types of deductions and credits available. By choosing the right filing status, you can minimize your taxes.

The four filing statuses are single, married filing jointly, married filing separately ,and head of household. There is a fifth filing status, called Qualifying Widower/Widow. There are seven income tax brackets for 2023. Your tax rate depends on your filing status and the amount of your taxable income. For example, if you’re single and your taxable income is more than $11,001 but not more than $44,725 (in 2023), it’s taxed at 12 percent. If you’re a head of household filer, though, your taxable income can climb to $59,850 and still be taxed at 15 percent. So, some filing statuses are more beneficial than others.

Although you’ll generally want to choose whichever filing status minimizes your taxes, other considerations (such as a pending divorce) may also come into play.

You’re single if you’re unmarried or legally separated from your spouse on the last day of the year

This one’s pretty straightforward. And, depending on your circumstances, it may be your only option. Your filing status is determined as of the last day of the tax year (December 31). To use the single status, you must be unmarried or separated from your spouse by either divorce or a written separate maintenance decree on the last day of the year.

Married filing jointly may result in tax savings for married couples

You may file jointly if, on the last day of the tax year, you are:

  • Married and living together as husband and wife
  • Married and living apart, but not legally separated under a divorce decree or separate maintenance agreement, or
  • Separated under an interlocutory (i.e., not final) decree of divorce

Also, you are considered married for the entire tax year for filing status purposes if your spouse died during the tax year.

When filing jointly, you and your spouse combine your income, exemptions, deductions, and credits. Filing jointly generally offers the most tax savings for married couples. For one thing, there are many credits that you can take if you file a joint return that you can’t take if you file married filing separately. These include the child and dependent care credit, the adoption expense credit, the American Opportunity credit (the Hope credit), and the Lifetime Learning credit.

Still, this filing status is not always the most advantageous. If your spouse owes certain debts (including defaulted student loans and unpaid child support), the IRS may divert any refund due on your joint tax return to the appropriate agency. To get your share of the refund, you’ll have to file an injured spouse claim. You can avoid the hassle by filing a separate return.

You don’t have to be separated to choose married filing separately

You and your spouse can choose to file separately if you’re married as of the last day of the tax year. Here, you’d report only your own income and claim only your own deductions and credits. Filing separately may be wise if you want to be responsible only for your own tax. With a joint return, by comparison, each spouse is jointly and individually liable for the full amount of the tax due. So, if your spouse skips town, you’d be left holding the tax bag unless you qualified as an innocent spouse.

Filing separately might also be the best tax move if one spouse has significant medical expenses or miscellaneous itemized deductions. Your ability to take these deductions is tied in to the level of your adjusted gross income (AGI). By filing separately, the AGI for each spouse is reduced. Keep in mind that if you and your spouse file separately and your spouse itemizes deductions, you’ll have to do the same.

Remember, though, that you won’t qualify for certain credits (such as the child and dependent care tax credit) and can’t take certain deductions if you file separately. For example, you cannot deduct qualified education loan interest if you’re married, unless you file a joint return.

Head of household status offers certain income tax advantages

Those who qualify for the head of household filing status get special tax treatment. Not only are the tax rates lower for head of household filers than for single filers and married filing separately filers, but the standard deduction is larger as well. However, you’ll have to satisfy the following requirements:

Qualifying widow(er) with dependent child offers the advantages of a joint return

The term qualified widow or widower refers to a tax filing status that allows a surviving spouse to use the married filing jointly tax rates on an individual return. The provision is good for up to two years following the death of the individual’s spouse. The taxpayer must remain unmarried for at least two years following the death of their spouse in order to qualify for this status. This status allows you to use joint tax rates and offers the highest possible standard deduction, the one applicable to joint tax returns. To qualify, you must satisfy all of the following conditions:

  • Qualified widow or widower is a tax filing status that allows a surviving spouse to use the married filing jointly tax rates on their tax return
  • The survivor must remain unmarried for at least two years following the year of the spouse’s death to qualify for the tax status
  • The taxpayer must have at least one dependent child and have handled at least half of the household costs
  • The qualifying widow(er) status offers the same standard deduction amount and tax bracket ranges as those for married couples who file jointly
  • The surviving spouse must file as single or head of household following the third year of their spouse’s death

As you can see, choosing the correct filing status is not always easy. You might want to speak with a tax professional or consult IRS Publication 17 for more information.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Tax Tips: Homeowners Insurance

Tax Tips: Homeowners Insurance

The purpose of home insurance is obvious. The tax rules surrounding home insurance, though, aren’t always so clear. For example, if your insurance won’t cover you for a given loss, are you simply left holding the bag, or can you expect some tax relief? And what about premiums–can you deduct them or not? Here are some tax tips to help you make sense of it all.

If your home or possessions are damaged, destroyed, or stolen, you may get a tax deduction

If you suffer a home-related loss, begin by reading your homeowners policy carefully to find out what is and isn’t covered. Section 1 of your policy explains the types of property coverages, lists the specific perils that you’re insured against (e.g., damage caused by fire, theft, and hail), describes the exclusions from coverage (e.g., damage caused by a flood or earthquake), and details any conditions that you must meet for coverage to apply.

In many cases, your homeowners insurance will reimburse you for your loss. Sometimes, though, you’ll be only partially reimbursed or not compensated at all. In such cases, you may be entitled to some tax relief.

If your home is damaged or destroyed in an accident or by an act of nature (e.g., windstorm, lightning), and your homeowners insurance does not completely reimburse you for the loss, you may be able to claim a casualty loss tax deduction on your federal income tax return. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.) In addition, if your personal possessions are stolen, damaged, or destroyed, you may be able to claim a theft or casualty loss tax deduction if you’re not fully reimbursed for your loss.

How does the theft or casualty loss deduction work?

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction. For individual taxpayers, the casualty or theft deduction is subject to two limitations. First, you can’t deduct the first $100 of any loss. So, if your $99 watch was stolen from your bedroom and nothing else was taken, you’re out of luck (at least in terms of a deduction). Second, even if your loss exceeds $100, you can only deduct casualty and theft losses if the total amount you lost in the year (after the $100 per casualty threshold) exceeds 10 percent of your adjusted gross income (AGI).

If you’re reimbursed for your loss by your insurer, you must subtract this reimbursement amount when calculating your loss for tax purposes. In other words, you do not have a casualty or theft loss to the extent you are reimbursed. Also, keep in mind that if you do suffer a property loss and the property is covered by insurance, you should file a timely insurance claim. Otherwise, you may not be able to deduct your loss.

Calculating the amount of your loss

If you suffer a personal (as opposed to business) property loss, the amount of your loss is the smaller of (1) the decrease in the fair market value (FMV) of the property as a result of the loss or (2) your adjusted basis in the property before the loss. (Adjusted basis is usually your cost, increased or decreased by various events.) After determining the smaller figure, you subtract any insurance reimbursements.

For example, assume a fire severely damaged your home. You had bought the house for $50,000 (adjusted basis) a few years ago, and it was appraised at $75,000 before the fire. It was worth only $15,000 after the fire. Your insurance company paid you $45,000 for the loss. Here’s what you do:

  1. Adjusted basis in the property before the loss: $50,000
  2. Decrease in property’s FMV: $60,000 ($75,000 minus $15,000)
  3. Loss: $50,000 (smaller of 1 or 2, above)
  4. Subtract insurance reimbursement of $45,000
  5. Amount of loss: $5,000

Finally, you’d apply the two deduction limitations ($100 deductible; 10 percent of AGI) to determine the amount of your casualty loss deduction.

In general, you’ll use Form 4684 to figure the amount of your deduction; consult a tax professional if you need help. IRS Publication 584 can also provide you with additional information.

What about insurance deductibles?

With most homeowners insurance policies, you must pay a deductible before the insurer will reimburse you (partially or fully) for your loss. So, if you have a policy with a $500 deductible and you suffer a theft loss, you’ll have to cover the first $500 of your loss out of pocket. It’s possible, though, that you’ll be able to write off this deductible as a theft loss on your federal tax return (subject to the $100 and 10 percent rules).

Can you normally deduct your homeowners insurance premiums on your tax return?

If you’re like most people and use your home only for personal purposes, you can’t deduct your homeowners insurance premiums on your tax return.

Deducting your homeowners insurance premiums when you have a home office

If you have a home office and qualify to take a home office deduction, you may be able to deduct some of your housing expenses, including part of your homeowners insurance premiums, on your federal income tax return. A special formula is used to determine which portion of your housing expenses may be traced or allocated to your home office, and you’ll be able to deduct the same percentage of your homeowners insurance premiums. For example, if you can allocate 15 percent of your housing expenses to your home office, you’ll be able to deduct 15 percent of your premiums.

If you have a home-based business, though, you should consider purchasing additional insurance. A standard homeowners policy typically won’t provide coverage for your business equipment in the home, and it won’t cover business-related personal liability losses at all (including the delivery person who slips and falls). You may be able to add an endorsement to your existing homeowners policy, buy a home-based business package policy, or buy individual business insurance. Those insurance premiums would then be fully deductible against business income.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Understanding Personal Tax Credits

Understanding Personal Tax Credits

Have you ever thought that you’re paying too much income tax? You may be, if you’re not claiming all of the tax credits for which you are eligible when you file your federal tax return. These credits may significantly reduce your tax liability.

What is a tax credit?

A tax credit is a dollar-for-dollar reduction of your tax liability. Generally, after you’ve calculated your federal taxable income and worked out how much tax you owe, you can subtract the amount of any tax credit for which you are eligible from your tax obligation. In some cases, if your tax credits exceed your tax liability, you will be able to claim the difference as a refund.

What is the difference between a tax deduction and a tax credit?

A tax deduction reduces your taxable income, so that when you calculate your tax liability, you’re doing so against a lower amount. Essentially, your tax obligation is reduced by the same percentage as your tax rate.

Here’s an example. If you’re in the 28 percent marginal tax bracket and you have $1,000 in tax deductions, your tax liability will be reduced by $280. That reduction would be greater if you were in a higher tax bracket.

A tax credit, on the other hand, is constant. A tax credit of $100 will reduce your tax liability by $100, regardless of your tax bracket. Here’s a quick summary of some of the main personal federal tax credits that may be available to you.

Child and dependent care credit

If you’re working or looking for work, and you need to pay someone to look after your child or other qualifying individual, you may be eligible for the child and dependent care credit. Depending on your adjusted gross income, you may be able to claim up to 35 percent of the qualifying expenses that you pay to provide care for a dependent child under the age of 13, a disabled spouse, or a disabled dependent. A dollar limit applies to the amount of work-related expenses you can use to figure the credit. This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons.

For more information, see IRS Publication 503.

Child tax credit

The child tax credit provides tax relief for parents and others who have dependent children. If you’re eligible, you may be entitled to take a credit of up to $1,000 per child. A qualifying child is typically a child, grandchild, stepchild, or foster child under the age of 17 who lives with you for more than half the year and provides less than half of his or her own support.

The child tax credit begins to phase out if your modified adjusted gross income (MAGI) exceeds a certain level ($110,000 for married persons filing jointly, $55,000 for married persons filing separately, and $75,000 for heads of household, widow(er)s, and single persons).

For more information, see IRS Publication 972.

Earned income credit

The earned income credit benefits working taxpayers who have low income. You can apply for it only if you work, either as an employee or in your own business, and you have earned income during the tax year. The amount of the credit is based on your adjusted gross income, your filing status, and the number of qualifying children you have.

For more information, see IRS Publication 596.

Education credits

There are two tax credits that you may qualify for if you, your spouse, or your children are attending an eligible educational institution: the American Opportunity tax credit (formerly known as the Hope credit) and the Lifetime Learning credit. Whether you can claim one of these credits (they can’t both be claimed in the same year for the same student) depends on your educational status, your modified adjusted gross income (MAGI), and the amount of qualified tuition and related expenses you pay in a given year.

The American Opportunity credit is worth a maximum of $2,500 per year and is available for each student in the household who is in the first four years of undergraduate education (provided the student is attending at least half-time). The Lifetime Learning credit is worth a maximum of $2,000 per year and is more widely available–students who are attending college or graduate school (even less than half-time), taking continuing education courses, or pursuing courses connected to hobbies and other interests may be eligible for this credit. However, the Lifetime Learning credit is limited to $2,000 per tax return per year, regardless of how many students in the family may qualify.

To qualify for the full Lifetime Learning credit 2022, you must meet all three. You, your dependent or a third party pay qualified education expenses for higher education. ou, your dependent or a third party pay the education expenses for an eligible student enrolled at an eligible educational institution. You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).

To qualify for the full American Opportunity credit 2022, your modified adjusted gross income (MAGI) must be $80,000 or less ($160,000 or less for married filing jointly). ou receive a reduced amount of the credit if your MAGI is over $80,000 but less than $90,000 (over $160,000 but less than $180,000 for married filing jointly). You cannot claim the credit if your MAGI is over $90,000 ($180,000 for joint filers).*

*Source: IRS.gov. For more information, see IRS Publication 970.

Other tax credits

You may also be eligible for other federal tax credits, including the credits listed below:

  • Adoption tax credit
  • Tax credit for the elderly or the disabled
  • Foreign tax credit
  • Tax credit for IRA and retirement plan contributions (the retirement savings contribution, or “savers” credit)
  • Tax credit for health insurance costs (for certain qualifying individuals only)
  • Tax credits for certain qualified fuel cell and plug-in electric drive motor vehicles
  • Tax credit(s) for making energy-efficient improvements to a primary residence, or for purchasing qualified energy-efficient property

If you would like more information on personal tax credits, contact your tax advisor or log on to the IRS website at www.irs.gov.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Tax Planning Tips: Auto Insurance

Tax Planning Tips: Auto Insurance

It’s no secret that auto insurance can safeguard your assets and provide you with peace of mind. But did you know that auto insurance may also benefit you at tax time? Certain insurance-related costs can be deducted on your individual federal income tax return. You’ll need to know what can be deducted, and how insurance reimbursements can affect those deductions.

You can’t deduct your auto insurance premiums if you use your car only for personal purposes

If you use your motor vehicle only for personal purposes (like most people), you can’t deduct your auto insurance premiums on your tax return.

If you use your car for business purposes, you may be able to deduct some car-related expenses, including insurance premiums

Whether you’re self-employed or an employee, you may be able to deduct certain car-related expenses if you use your car for business purposes. However, if you use your car on business and your employer fully reimburses you for your expenses, you can’t deduct those expenses. If you use your car for both personal and business reasons, you can deduct only that portion of your car expenses that can be traced to business use. (For individual taxpayers, commuting to work normally doesn’t qualify as business use.)

At tax time, you take your deduction as a miscellaneous itemized deduction. Miscellaneous itemized deductions are deductible only to the extent that they total more than 2 percent of your adjusted gross income (AGI). So, if 2 percent of your AGI equals $2,000 and your total miscellaneous itemized deductions (including business-related auto expenses) only come to $1,900, you won’t be able to deduct your auto expenses on your tax return.

There are two methods for calculating auto expense deductions–the standard mileage allowance and the actual expenses method:

  • Standard mileage allowance: If you own or lease a car and are not reimbursed for the business use of your vehicle, you may be able to calculate your deduction using the standard mileage rate ( 65.5 cents per mile driven for business use, up 3 cents from the midyear increase setting the rate for the second half of 2022). Several requirements apply, however. You can also deduct the cost of business-related tolls and parking (but not commuting-related tolls and parking).
  • Actual expenses method: You may be able to deduct the actual cost of using your vehicle for business. Your business expenses can include depreciation, tolls, parking fees, insurance premiums, repairs, gas and oil, rental fees, lease fees, excise taxes, and garage rental fees (to the extent that the costs were related to business and not your personal use).

No matter which method you use, the IRS requires that you keep careful records of your business travel, including the dates you used your car, the number of miles driven, and the reason for the travel on business-related tasks.

If your car is stolen or damaged, you may be able to claim a theft or casualty loss deduction

If your car is stolen, damaged, or destroyed in an accident or by an act of nature (e.g., fallen tree, flood), you may be able to claim a theft or casualty loss tax deduction if your auto insurance coverage does not completely reimburse you for your loss. (A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual.)

For individual taxpayers, the casualty and theft deduction is an itemized deduction that is subject to two limitations. First of all, you can’t deduct the first $100 of any loss. If your $99 used radio is stolen from your car, you’re out of luck (at least in terms of a deduction). Second, even if your loss exceeds $100, you can only deduct casualty and theft losses if the total amount you lost in the year (after the $100 per casualty threshold) exceeds 10 percent of your AGI.

You must file federal Form 1040 and itemize your deductions on Schedule A to claim a casualty or theft loss deduction. Use Form 4684 to figure the amount of your deduction, and consult a tax professional if you need help.

If you’re reimbursed for your loss, you must subtract the reimbursement when calculating your loss. In other words, you do not have a casualty or theft loss to the extent you are reimbursed. If your property is covered by insurance, you should file a timely insurance claim for reimbursement of your loss. Otherwise, you may not be able to deduct your loss. Generally, you must also file a police report for any theft losses.

What about auto insurance deductibles?

Auto insurance protection does not begin until the deductible has been satisfied. If you have an auto insurance policy with a $500 collision deductible and you get into an accident, you’d have to cover the first $500 of your loss out of pocket. At tax time, though, this deductible may be written off on your tax return. This would be subject to the $100 and 10 percent rules, as a casualty loss if you meet all necessary requirements. However, you can’t deduct a casualty loss involving a car accident if your willful negligence or willful act caused the accident.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.