Safe at Home - New Simplified Home Office Deduction

You work from home. You know that you are entitled to deduct your “home office expenses” but your accountant has warned you that it is very tricky, and that the deduction often raises a “red flag” for the irs or the state in reviewing your return because it is an often abused deduction. You don’t want to invite an audit and the expense of it (even if you are 100% within the law), but you are entitled to the home office deduction. What is a savvy business person to do?

The IRS feels your pain – no really, they do – and they have created a new “safe harbor” for the home office deduction. A safe harbor is an alternative to all the record keeping justifying the home office deduction. Instead, if you qualify you can deduct $5 a square foot, up to 300 square feet – or $1500. If you actually have a greater deduction calculated the old way is worth more than that, you can certainly continue to use the computer method. But, if $1500 is close or good enough, and all that record keeping can be reduced, this might be a good idea for you. After all, your job is to focus on the success of your business, not the some of the administrivia that comes with being a business owner.

If this might be of interest to you, on to the legal details…..

Image courtesy of Stuart Miles /

Fiscal Cliff Averted? Time Will Tell, But Here are the Details of the 2013 Tax Laws

 I am not sure how you can have great faith in the thoughtfulness of a process over hundreds of billions of dollar of our (the taxpayers) money, that happened in all of 48 hours, but here is the what is going to the president for signature as “the American Taxpayer Relief Act.”

The highlights:

  • Income Tax: The top income tax rate jumps to 39.6% (up from 35%) for individuals making more than $400,000 a year ($450,000 for joint filers; $425,000 for heads of household);
  • Estate, Gift, GST Tax: For estate, gift, and generation-skipping transfer (GST) tax purposes, for individuals dying and gifts made after 2012, there is a $5 million exemption (adjusted for inflation), and the top estate, gift and GST rate is permanently increased from 35% to 40% (whoo hoo – a permanent estate tax law!)
  •  Social Security: The two-percentage-point reduction in Social Security tax, will be allowed to expire, so the employee portion of the tax will go back up to 6.2% (has been 4.2%);
  • AMT: The alternative minimum tax (AMT) “patch” is made permanent. Sources estimated that 30 million taxpayers will escape being subject to the AMT;
  • Dividends and Capital Gains: The top dividends and capital gains tax rate goes to 20% (up from 15%) for individuals making more than $400,000 a year ($450,000 for joint filers);
  • Personal Exemption Phaseout: The Personal Exemption Phaseout (PEP), which had been suspended, is returning in 2013 with a starting threshold of $300,000 for joint filers / $275,000 for heads of household / $250,000 for single filers / $150,000 (for married taxpayers filing separately. The phaseout reduces the total amount of exemptions that can be claimed by a taxpayer by 2% for each $2,500 by which the taxpayer's adjusted gross income (AGI) exceeds the starting threshold;
  • Deduction Limitation: The limitation on deductions for high income earners, which had been suspended, is reinstated with a threshold of $300,000 for joint filers / $275,000 for heads of household / $250,000 for single filers / $150,000 for married taxpayers filing separately. This limitation reduces a taxpayer’s itemized deductions by 3% of the amount by which the taxpayer's AGI exceeds the threshold amount (subject to a maximum of 80%);
  • Tax Credits. Various tax credits are extended including research credit, energy credits, college tuition credit, earned income tax credit, child tax credit;
  • Medicare: The scheduled 27% reduction in payments to Medicare doctors has been ended.
  • Unemployment: Long term unemployment benefits are extended through 2013