Great new article by the AIPB!

When to use the new IRS home-office safe harbor

It turns out that deducting the actual expenses of a home office instead of using the IRS safe harbor does not always yield the biggest tax deduction. So, when should you use the IRS safe harbor v. actual expenses method?

The safe harbor lets you deduct on Schedule A $5/sq. ft., up to $1,500 (see our March and April issues) and prorate normally allowable home expenses such as mortgage interest, property taxes and casualty losses. But you cannot prorate a portion of actual house expenses—e.g., homeowners’ insurance, utilities and repairs.

Thus, to know which method to use you must consider both the amount of home-office expenses deductible from gross income v. home-related itemized expenses deducted on Schedule A.

An analysis published in Tax Notes Today found that in three hypothetical situations with different-sized homes, the actual expense method minimized Schedule C income—but the safe harbor method maximized Schedule A deductions.

The analysis found that for total tax savings, the safe harbor is best when the home-office is a smaller percentage of the home’s square footage: 10% in the examples. When a home office space is a larger percentage of the home (20%–25% in the examples) deducting actual expenses reduces taxes more.

But other factors can change the results.

For example, if personal income exceeds the Social Security wage base, the safe harbor method saves more on taxes because the higher Schedule C reduction offered by taking actual expenses becomes less beneficial when it stops reducing the self-employment tax as well as FIT.

Other factors that change results include whether your total itemized deductions or other tax benefits are subject to various phase outs as your adjusted gross income rises. In addition, actual expenses that affect only the home office but not the rest of the home might be deductible in their entirety as actual home office expenses. Nor does the safe harbor permit the depreciation of the home office; on the other hand, when depreciation is taken, it reduces the basis of the home.

  

You can alternate between the two methods each year, so a taxpayer who wants to maximize deductions should calculate both methods annually (tax software should let you compare these methods). Keep in mind non-tax factors. The safe harbor method reduces audit risk—safe harbors always do, because they result in lower tax deductions than taking actual expenses. It also reduces recordkeeping and the cost of tax preparation. 

10 Helpful Tips for Paying Taxes

IRS Tax Tip 2013-55

 

Are you making a payment with your federal tax return this year? If so, here are 10 important things the IRS wants you to know about correctly paying your federal income taxes.

Never send cash.

If you file electronically, you can file and pay in a single step with an electronic funds withdrawal. If you e-file by yourself you can use your tax preparation software to make the withdrawal. If you use a tax preparer to e-file, you can ask the preparer to make your tax payment electronically.

Whether you file a paper return or e-file your return, you can pay by phone or online with a credit or debit card. The company that processes your payment will charge a processing fee.

If you file Schedule A, Itemized Deductions, you may be able to deduct the credit or debit card processing fee on next year’s return. This is a miscellaneous itemized deduction subject to the 2 percent limit.

Electronic payment options provide another way to pay taxes by check or money order. You can make payments 24 hours a day, seven days a week. Visit IRS.gov and click on the ‘Payments’ tab near the top left of the IRS home page for more details.

If you pay by check or money order, make sure it is payable to the “United States Treasury.”

Be sure to write your name, address and daytime phone number on the front of your payment. Also, write the tax year, form number you are filing and the first Social Security number listed on your tax return.

Complete Form 1040-V, Payment Voucher, and include it with your tax return and payment when mailing it to the IRS. Double-check the IRS mailing address. This will help the IRS process your payment accurately and efficiently. Go to IRS.gov to download and print this form.

Remember to enclose your payment with your return but do not staple it to any tax form.

For more information, call 800-829-4477 and select TeleTax Topic 158, Ensuring Proper Credit of Payments. You can also find out more in the Form 1040-V instructions available at IRS.gov.

Eight Facts on Late Filing and Late Payment Penalties IRS Tax Tip 2013-58, April 18, 2013

April 15 is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline. Here are eight important points about penalties for filing or paying late. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.

The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.

The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.

If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.

If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.

If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.

If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.

Note: The IRS recently announced special penalty relief to many taxpayers who requested an extension of time to file their 2012 federal income tax returns and some victims of the recent severe storms in parts of the South and Midwest. For details about these relief provisions, see IRS news releases IR-2013-31 and IR-2013-42. The IRS has also provided individual tax filing and payment extensions to those affected by the Boston explosions tragedy. See IR-2013-43 for more information.

For more information visit the IRS.

Learn how to promote your books with Carolyn Howard Johnson

Carolyn Howard-Johnson is a multi award-winning novelist and poet. She is also the author of the award-winning series of books for writers, How to do it Frugally. Carolyn has been an instructor for nearly a decade at the renowned UCLA Extension Writers’ Program. She is visiting Writers in Business to announce her newest release, the second edition of the Frugal Book Promoter.

Welcome Carolyn! Congratulations on your new book! Please tell us about it.

The new edition of The Frugal Book Promoter is bigger (nearly twice as big!) and updated. This edition even has its own subtitle to reflect the broader audience it appeals to. It is - “Ta Da! How to get nearly free publicity on your own or by partnering with your publisher.” But it still has all the award-winning qualities of the first edition, maybe even more! This book is the self-promoter’s bible.

I’ve learned a lot from reading your books! You share great ideas that are affordable and easy to put into action. Could you share one tip with my readers?

Sure, the Internet is traditionally a place where freebies abound. To assure traffic to your site, give something away. E-books are a good way to start because they cater to our need for instant gratification (and information!).

I understand you have received some influential endorsements for this book.

Yes, Dan Poynter, author of The Self-Publishing Manual said “The most expensive parts of book promotion are the mistakes. This book will save you time and money.”

It has been honored by USA Book News and Los Angeles Book Festival.

Tony Eldridge, author and blogger at Marketing Tips for Authors also endorsed my book. He wrote “I love this book...it is the answer to an author's prayer. Most authors are shocked and unprepared for the marketing that goes into having a successful book. Carolyn creates a resource that you'll go to again and again for advice and instructions on promoting. Seldom do I see a resource packed with as much practical information as I see in The Frugal Book Promoter II."

This praise is well deserved. You have authored several books on effective, frugal promotion and I understand you also offer a newsletter for writers.

My newsletter, Sharing With Writers Sharing With Writers, is published semi-monthly and offers useful tips for writers including the craft of writing, marketing, promotion, editing and social networking. It’s a place where writers can come to learn and share what they know.

You can sign up for the newsletter by sending an email to HoJoNews@aol.com. Learn more about the Frugal Book Promoter and Carolyn’s other outstanding books by visiting her online at How to do it Frugally.com.

Looking for your tax refund?

Useful tools for writers from the IRS: http://www.irs.gov/uac/Newsroom/Small-Business-and-Self-Employed-Tax-Center-Provides-Online-Tools-and-Resources

Ten Things to Know about Free Volunteer Tax Help - IRS.gov http://www.irs.gov/uac/Newsroom/Ten-Things-to-Know-about-Free-Volunteer-Tax-Help

Important information about tax filing this year.

http://www.irs.gov/uac/Newsroom/IRS-Offers-Tips-to-Help-Taxpayers-with-the-January-30-Tax-Season-Opening

Top 10 Ways to Get Help from the IRS! http://www.irs.gov/uac/Newsroom/Top-10-Ways-to-Get-Help-from-IRS.gov

IRS Announces Simplified Option for Claiming Home Office Deduction

Interesting new option for writers working out of a home office. Directly from the IRS:

The Internal Revenue Service announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

"This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction," said Acting IRS Commissioner Steven T. Miller. "The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013."

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. The new simplified option is available starting with the 2013 return most taxpayers file early in 2014.

Further details on the new option can be found in Revenue Procedure 2013-13, posted today on IRS.gov. Revenue Procedure 2013-13 is effective for taxable years beginning on or after Jan. 1, 2013, and the IRS welcomes public comment on this new option to improve it for tax year 2014 and later years. There are three ways to submit comments.

E-mail to: Notice.Comments@irscounsel.treas.gov. Include “Rev. Proc. 2013-13” in the subject line.

Mail to: Internal Revenue Service, CC:PA:LPD:PR (Rev. Proc. 2013-13), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.

Hand deliver to: CC:PA:LPD:PR (Rev. Proc. 2013-13), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.

The deadline for comment is April 15, 2013.

Employee or Independent Contractor?

As your writing business grows, there may be times when you need to hire help. You also may be providing writing services and wonder if you are working for a company as an employee or if you are really self-employed.

The Internal Revenue Service has strict definitions they use when determining if someone is an employee or a subcontractor. You can learn all about it on their web site using this link:Employee vs Independent Contractor