Your Tax Deductions Guide for 2022
Home Office: Only Self-Employed Workers Qualify for Home Office Deductions
TAX FACTS: To take a home office deduction, you must be self-employed and the home office must be used exclusively and regularly for your business and be your principal place of business, with few exceptions. If you receive a W-2 from your employer, you do not qualify for a home office deduction. Second, the home office deduction can only be taken if you itemize your deductions. If your home office qualifies, there are two ways to claim the home office deduction.
#1: You can prorate the usage of your home. For example, if your home office space is 250 square feet and your home is 2,500 square feet, you could claim as a deduction 10% of home-office expenses such as utilities, insurance, repairs, cleaning, taxes, mortgage interest, etc. Be aware, however, that any depreciation claimed after May 6, 1997, will be taxed at 25% if the residence is sold for again, whether or not the property has been converted to personal use.
#2: For tax year 2013, a simplified home office deduction calculation was introduced to bypass maintaining detailed expense records. Simply deduct $5 for every square foot of home office space used, up to a maximum of 300 square feet or $1,500. This simplified expense is recorded on Schedule C rather than Form 8829, which allows you to separately deduct mortgage interest and real estate taxes on Schedule A.
HELPFUL HINT: If you (or your family) use your home office for non-business purposes, it cannot be claimed on your tax return. To claim home office deductions, the space must be used exclusively and regularly for business purposes.
Vacation Homes: Personal-Use Days Key to Calculations
TAX FACTS: Vacation homes have separate tax rules that vary according to the owner’s personal-use days. A residence is a vacation home if the owners used it more than 14 days or 10% of the days it was rented during the year (if rented more than 140 days). If there was rent income, other property expenses may be deductible, including depreciation, but only up to the amount of the rent income.
For a vacation home, all mortgage interest and property taxes are usually deductible if using a business tax structure. As an individual, the mortgage interest deduction is capped by the combined total $750,000 limit for married filing jointly and $375,000 for others. If the standard deduction is higher than if you were to itemize, the interest and taxes amounts won’t matter for tax calculations.
HELPFUL HINT: For non-vacation rental homes, you may claim rent expense deductions other than interest and taxes, even if it results in a loss. When personal use of a vacation home is involved, deductions are determined by allocating expenses, including interest and taxes, between the rental and personal-use periods. If you rent your vacation home (or principal residence) for 14 days or less a year, you do not have to pay taxes on that rent income.
Tax-Free Profits: Big Benefits Await Home Sellers
TAX FACTS: Taxpayers who sell their principal (year-round) residence can pocket — tax-free — as much as $500,000 in profit if they file federal taxes jointly or $250,000 if they file singly.
The property must have been owned and used as their principal residence for any two of the prior five years that end on the sale date. Homeowners can shelter the profits on the sale of a home as often as once every two years. If the two-year use and ownership tests are not met, but the home is sold because of special circumstances (e.g., a health problem or job loss), the profit exclusion is prorated. Gains above $500,000 or $250,000 that are taxed at current capital gains rates also may be subject to a 3.8% surtax on Net Investment Income (NII).
NOTE: The surtax applies to individuals, estates and trusts that have Modified Adjusted Gross Incomes (MAGIs) that exceed certain thresholds. For individuals, the thresholds are $250,000 for married couples filing joint returns; $125,000 for married couples filing separate returns; and $200,000 for single persons, heads of households and qualifying widows/widowers (surviving spouses who qualify for the same breaks as married couples for two years after a spouse’s death).
The surtax is imposed on the lesser of (A) NII or (B) the excess of (1) MAGI over (2) the threshold amount. For example, a couple’s NII is $200,000, MAGI is $300,000, and threshold is $250,000. Their surtax is $1,900 — 3.8% of $50,000 ($300,000 MAGI minus $250,000 threshold). What happens when home sellers have MAGIs that exceed the applicable threshold of $250,000, $125,0000 or $200,000? They may be subject to the 3.8% tax on gains from sales that exceed the profit exclusions of $500,000 or $250,000. But they are liable for the tax only on the amount by which MAGI exceeds the threshold. Even if liable, sellers still can take profit exclusions of $500,000 or $250,000.
HELPFUL HINT: NII includes income from such sources as rents, gains from sales of second homes and gains from sales of investment properties. They’re possibly subject to the 3.8% tax, to the extent that gains aren’t otherwise offset by capital losses. Browse to http://bit.ly/IRSNIIT for further details.
Moving Expenses: Only Military Personnel Can Deduct Relocation Costs When Moving
TAX FACTS: Only members of the military on active duty (or their spouse or dependents) who move due to a military order for a permanent change of station may qualify for a moving-expense deduction. As a bonus for those members of the military who qualify, you do NOT need to itemize deductions to use the moving deduction and you will not have to pay tax on qualified moving expense reimbursements.
Whether a homeowner or renter, you can deduct the cost of moving household goods and the direct cost of moving you and your family. You can also deduct expenses for lodging during the move but not meals. Use Form 3903 to tally your moving deductions, provided your employer did not reimburse you for them.
HELPFUL HINT: For non-military related moves, employers may still reimburse you for any moving expenses you incur, but these reimbursements are now taxable. Keep in mind that these reimbursements will show up on your W-2 as income and may increase your tax liability.
These are just summaries of complex tax rules. Be sure to work with a qualified tax professional to see how these provisions apply to your situation.