Tag Archives: CPA Deerfield Beach

What The Fiscal Cliff Means For Your Taxes

After tense negotiations—with a lot of publicity and the threat of deadlock and S & P credit downgrades—the terms of a fiscal cliff resolution have finally been successfully negotiated.

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The major tax provisions are as follows:

• The income tax rate increases 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);

• The two-percentage-point reduction in payroll taxes for Old Age, Survivors and Disability Insurance (OASDI) tax, commonly known as the Social Security tax, will be allowed to expire;

• The higher exemption amounts for alternative minimum tax (AMT)—the so-called “patch”—are made permanent, resulting an estimated 30 million taxpayers escaping being subject to the AMT;

• Dividends and capital gains are taxed at 20% (up from 15%) for individuals making at least $400,000 ($450,000 for joint returns);

• The Personal Exemption Phaseout (PEP), which had previously been suspended, is reinstated with a starting threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Under the phaseout, the total amount of exemptions that can be claimed by a taxpayer subject to the limitation is reduced by 2% for each $2,500 (or portion thereof) by which the taxpayer’s adjusted gross income (AGI) exceeds the applicable threshold;

• The “Pease“ limitation on deductions, which had previously been suspended, is reinstated with a threshold of $300,000 for joint filers and a surviving spouse, $275,000 for heads of household, $250,000 for single filers, and $150,000 (one-half of the otherwise applicable amount for joint filers) for married taxpayers filing separately. Thus, for taxpayers subject to the “Pease” limitation, the total amount of their itemized deductions is reduced by 3% of the amount by which the taxpayer’s AGI exceeds the threshold amount, with the reduction not to exceed 80% of the otherwise allowable itemized deductions;

• 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%;

• Tax credits for businesses, including the Code Sec. 41 research credit and the Code Sec. 199 domestic production activities deduction, are generally extended through the end of 2013;

• A number of individual tax provisions have been retroactively extended through 2013. In addition, there is a five-year extension of credits that were enhanced as part of the stimulus, including the college tuition credit, the Code Sec. 32 earned income tax credit, and the Code Sec. 24 child tax credit;

• Various energy credits are also extended.

• Other nontax provisions in the bill include a “doc fix,” which stops a 27% reduction in payments to Medicare doctors scheduled to go into effect. Spending cuts as offsets to accomplish this. Unemployment benefits, which were set to expire at the end of 2012, are extended for the long-term unemployed through the end of 2013

For more details please contact us. The information contained within this website is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant.

 

CPA Deerfield Beach

 

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Converting nondeductible personal interest into deductible…


Many individuals and families (particularly those with school-age children), use personal loans or credit cards to buy cars or vans, finance private schooling, take vacations, etc.

If you are making significant payments on these kinds of debts, you know you can’t deduct the “personal interest.” That means you are paying the interest portion with after-tax dollars (and perhaps at very high rates as well).

There’s a way to convert your nondeductible interest payments into deductible expense. You can get this tax break if you own your own home.

Specifically, you can take out a home equity loan (in the normal way, from your bank for example) and use the proceeds to pay off your nondeductible debts. You will probably be paying at a lower rate, since many lenders are charging near prime on these loans. And the interest payments will be deductible even though you don’t use the loan for anything connected with the house.

Of course, before you borrow against the equity in your personal residence, you should be certain that you actually get the tax deduction benefit. As always, there are various technical restrictions and limits that may apply, depending on your particular tax facts and circumstances.

First, the loan must be secured by your residence. That is, the lender must have a mortgage interest in it. Don’t confuse so-called “home improvement” loans, which are just one type of personal loan, with qualifying “home equity” loans. The interest on an unsecured home improvement loan isn’t deductible.

Second, the residence securing the debt must either be your principal residence (essentially, the home you live in most of the year) or a single second residence, for example, a vacation home which you use for at least part of the year. If you own more than one “second” residence, a home equity loan secured by only one of them (your choice) can qualify.

Third, although, as noted above, home equity debt doesn’t have to be used on the home, there are limits on the amount of debt than can qualify. Specifically, qualifying home equity debt can’t exceed the lesser of (a) $100,000, or (b) your equity in the home (specifically, the fair market value of the home at the date of the loan reduced by the “acquisition debt,” generally, your first mortgage). For example, say a taxpayer takes out a first mortgage to buy a home worth $300,000. Later, when the first mortgage is still $200,000, but because of a downturn in the real estate market the value of the home has declined to $275,000, the taxpayer takes out a home equity loan to reduce his credit card debts and pay for his daughter’s wedding. The taxpayer will only be able to deduct the interest on a maximum of $75,000 of any home equity loan he takes out ($275,000 fair market value minus $200,000 acquisition debt), even though the lender may be willing to make a loan in excess of the taxpayer’s $75,000 equity in the home. Thus, if the taxpayer took out a $100,000 home equity loan, only 75% of the interest on the loan would be deductible.

Also, you should bear in mind that interest on a home equity loan isn’t deductible for purposes of the alternative minimum tax (AMT), unless you use the loan to improve your home. This is an important consideration, since an increasing number of taxpayers are subject to the AMT.

Note that a home equity lender is required to give you an information return (Form 1098) reporting the interest you paid, but that form doesn’t show the deductible percentage, just the total amount of interest paid.

I would be happy to personally go over all of these rules with you to see if the home equity technique—or other tax-saving strategies that your financial situation may suggest—will work for you.

Please contact us so we can meet.

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Business website costs

The business use of websites is widespread, but IRS has not yet issued formal guidance on when Internet website costs can be deducted.

Fortunately, established rules that apply to the deductibility of business costs in general, and formal IRS guidance that applies to software costs in particular (the “software guidelines”), provide a taxpayer launching a business website with some guidance as to the proper treatment of the costs. Here is a brief discussion of some relevant principles:


The time for deducting website design costs (i.e., costs of the website’s overall structure, functionality and appearance) depends on whether the costs are costs of “software” within the meaning of the “software guidelines.” Generally, the portions of the website’s design that are produced from sophisticated programming languages (for example, the “C++” language widely used in website design) will qualify as “software.” On the other hand, there is some doubt as to the extent to which the portions of a design produced from HTML (hypertext markup language) will qualify as “software.”


Website design costs that are “software” costs are deductible under “safe-harbor” rules. The deductibility of website design costs that are “software” costs is governed by the following “safe-harbor” rules.

Generally, if the individual or company launching the website “purchases” the design (i.e., acquires the design from a contractor who is at economic risk should the software not perform), the design costs are amortized (ratably deducted) by that individual or company over the three-year period beginning with the month in which the website is placed in service. Also, non-customized computer software placed in service in tax years beginning before 2013 qualifies as “section 179 property,” and is thus eligible for the Code Sec. 179 elective expensing deduction that is generally available only for machinery and equipment. For tax years beginning in 2011, the deduction is limited to $500,000. For tax years beginning in 2012, the deduction is limited to $139,000. The limits are reduced by the cost of other section 179 property for which the election is made. Also, the election is phased out for taxpayers placing more than $2,000,000 of section 179 property into service during a tax year beginning in 2011 (more than $560,000 for a tax year beginning in 2012). Non-customized software acquired and placed in service in calendar year 2011 is, alternatively, eligible for a 100%-of-cost depreciation deduction (100% bonus depreciation) unlimited by any dollar amount. For software placed in service in calendar year 2012, the bonus depreciation deduction is 50% of cost. The bonus depreciation for an item of software is reduced to take into account any portion of the item’s cost for which a Code Sec. 179 election is made, and regular depreciation deductions are reduced to take into account both the bonus depreciation and any Code Sec. 179 election.

If, instead of being purchased, the website design is “developed” (designed in-house by the individual or company launching the website or designed by an independent contractor who is not at risk should the software not perform), the individual or company launching the website can choose among alternative treatments, including, but not limited to, “currently deducting” the costs (deducting the costs in the year that the costs are paid, or accrued, depending on the taxpayer’s overall accounting method) or amortizing the costs under the three-year rule, discussed above, for a “purchased” design.


Website design costs that aren’t costs of “software” are deductible in accordance with useful life. The time for deducting website design costs that are costs of portions of the design that aren’t “software” depends on the expected “useful life” of these non-software portions of the design. Thus, these costs must be amortized over the number of years that it is expected that the non-software portions of the design will be used in the business (except if it is expected that these non-software portions of the design will have a useful life of no more than a year, in which case the costs can be currently deducted.)


Website content that is advertising is generally currently deductible; the treatment of other content costs will vary. Advertising costs are, generally, currently deductible. Thus, the costs of website content that is advertising are, generally, currently deductible. Website content that isn’t advertising will be currently deductible, or amortized over a multi-tax year period, depending on its useful life.

The deductibility of some website costs that are business start-up costs is limited. Where website costs that would otherwise be currently deductible are paid or accrued before a business begins, the costs are deductible only upon the termination or disposition of the business, unless the taxpayer elects to (1) deduct up to $5,000 of the costs in the year that the business starts and/or (2) amortize the costs over a period of 60 months or more beginning with the month that the business starts.

The above principles, and others that effect the deductibility of website costs, suggest ways in which the individual or company launching the website can “take charge” of the treatment of website costs. For instance, an individual or company who contracts for a website design that qualifies as software, and who seeks the favorable tax treatment that applies to the costs of “developed” software, can, if acceptable as a business matter, include, in its written agreement with the developer/contractor, terms that will put the risk that the software won’t perform on the individual or company. Another example of a way to manage the tax treatment of website costs is detailed, descriptive allocations of costs, both in contracts and in internal records.

If you are considering launching a business website, I will be pleased to discuss with you further, and help you implement, the above planning steps or others that will help you manage the tax treatment of your website costs.

Deerfield Beach CPA

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Avoiding hobby-loss restrictions

Like many of us, you’ve probably dreamed of turning a hobby or avocation into a regular business. You won’t have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), IRS may step in and say it’s a hobby—an activity not engaged in for profit—rather than a business.
What are the practical consequences? Under the so-called hobby loss rules, you’ll be able to claim those deductions that are available whether or not the enterprise is engaged in for profit (such as state and local property taxes). However, your deductions for business-type expenses (such as rent or advertising) will be limited to the excess of your gross income from the hobby over those expenses that are deductible whether or not the enterprise is engaged in for profit. Deductible hobby expenses are claimed on Schedule A of Form 1040 as miscellaneous itemized deductions subject to a 2%-of-AGI “floor.” By contrast, if the new enterprise isn’t affected by the hobby loss rules, all otherwise allowable expenses would be deductible on Schedule C, even if they exceeded income from the enterprise.
There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won’t apply if the facts and circumstances show that you have a profit-making objective.
How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers’ expertise); the time and effort you expend in the enterprise; whether there’s an expectation that the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.
The classic “hobby loss” situation involves a successful businessperson or professional who starts something like a dog-breeding business, or a farm. But IRS’s long arm also can reach out to more prosaic situations, such as businesspeople who start what appears to be a bona-fide sideline business.
Please call our offices to get more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do right now to avoid a tax challenge.

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Tax Due Dates for June 2012

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Tax Due Dates for June 2012

June 11

Employees – who work for tips. If you received $20 or more in tips during May, report them to your employer. You can use Form 4070.

June 15

Individuals – If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due. (U.S. citizens living in the U.S. should have paid their taxes on April 17.) If you want additional time to file your return, file Form 4868 to obtain 4 additional months to file. Then file Form 1040 by October 15. However, if you are a participant in a combat zone, you may be able to further extend the filing deadline.Individuals – Make a payment of your 2012 estimated tax if you are not paying your income tax for the year through withholding (or will not pay enough tax that way). Use Form 1040-ES. This is the second installment date for estimated tax in 2012.

Corporations – Deposit the second installment of estimated income tax for 2012. A worksheet, Form 1120-W, is available to help you estimate your tax for the year.Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in May.Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in May.

http://www.safeharboraccounting.com/

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How to Verify that A Charitable Donation is Tax Deductible?

The IRS launched a new online search tool, Exempt Organizations Select Check, to help  find key information about tax-exempt organizations, such as federal tax status and filings.

By using the tool, you can check if the organization:

  • Is eligible to receive tax-deductible charitable contributions. This used to be done using IRS Publication 78, which is incorporated in the new tool. Taxpayers can rely on this list in determining deductibility of contributions (just as they did when Publication 78 was a separate electronic publication rather than part of EO Select Check).
  • Has its federal tax exemption automatically revoked under the law for not filing a Form 990-series return or notice for three consecutive years. (This is known as the Auto-Revocation List).
  • Has filed a Form 990-N (e-Postcard) annual electronic notice. (Most small organizations whose annual gross receipts are normally $50,000 or less are required to electronically submit Form 990-N, unless they choose instead to file a completed Form 990 or Form 990-EZ.)

EO Select Check also offers new search functions. For example, users can now look for organizations eligible to receive deductible contributions by Employer Identification Number (EIN), which was previously not a searchable or sortable field in the electronic Publication 78. And information about organizations eligible to receive deductible contributions is now updated monthly, rather than quarterly.

http://apps.irs.gov/app/eos/

This is the web address for to check on charities.

http://www.safeharboraccounting.com/

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New IRS Rules May Offer Tax Breaks for Property Owners

The IRS has published temporary regulations on the tax treatment of tangible property. These regulations are effective now, and they may create valuable tax saving opportunities for property owners.

What they cover

The new rules provide guidance on amounts paid to acquire, produce, or improve tangible property. The IRS states that they cover the accounting for, and dispositions of, property subject to depreciation. The published regulations are 68 pages long, covering many topics.

Among those topics, the regulations illustrate when taxpayers can immediately deduct outlays for property repairs. Such costs usually are considered deductible repair expenses if they do not materially add to the value or to the useful life of property. Conversely, activities that increase or restore a property’s value, substantially add to its useful life, or adapt it to a different use are considered improvements. The money spent on improvements must be capitalized and depreciated over a period of years.

Under the new regulations, repairs made during a time when a property is being renovated or rehabilitated may be deducted if they were not incurred because of the improvement. The costs of routine maintenance on property that is not a building or structural component are generally deductible.

The regulations define routine maintenance as a recurring activity that a taxpayer expects to perform to keep property in its ordinarily efficient operating condition. Examples include inspection, cleaning and testing of an item of equipment, and replacement of parts of the equipment with comparable replacement parts

The regulations also may provide tax relief to property owners who remove a component of a building and replace it. An owner in this situation is not required to capitalize and depreciate the amount paid for the old part while also capitalizing and depreciating the amount paid for the new one. The retirement of a structural component of a building can be considered a separate disposition; the new regulations allow the property owner to recognize a loss on the disposition of a structural building component before the disposition of the entire building. Therefore, the owner will not have to keep depreciating building components that are no longer in service.

Under these new rules, property owners may want to commission certain studies to see if any substantial tax savings can be realized under the new rules. For instance, a property owner might benefit from a building component study that documents the original cost of building components or systems that the owner has replaced.

Example 1: Mary Palmer owns an apartment building. She spends $225,000 to replace the entire roof of the building. Under the new regulations, Mary must capitalize the cost of the new roof and recover her expense via depreciation.

Mary hires a qualified party to perform a building component study, which concludes that the old roof had a cost of $150,000. The new regulations permit Mary to deduct the adjusted depreciable basis of the old roof. If that adjusted depreciable basis is $112,500, Mary is entitled to a $112,500 tax deduction in the year the new roof is installed. Mary won’t have to keep depreciating the old roof and deducting a few thousand dollars each year.

Looking at leases

A lease abandonment study also might be worthwhile. Such a study could document the costs necessary to prepare a property for a new tenant.

Example 2: Nick Raymond purchased a fully occupied building a few years ago. In 2012, one tenant vacates a leased space. Nick decides that he needs to remove and replace some of the components put in place for the former tenant in order to attract a new tenant. The replacement items include walls, electrical wiring, plumbing lines, and ceiling tiles.Nick commissions a lease abandonment study and determines the replaced items cost $60,000. Under the new regulations, Nick can deduct the adjusted basis of the replaced items, which might come out to be about $51,000, in 2012. Again, this upfront deduction is more valuable than extended depreciation.If you are a property owner and you plan on replacing a structural component or renovating a tenant’s space, contact our office to see if the temporary regulations can help deliver sizable tax savings.

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Investing on Margin Increases Risk and Potential Rewards

Investment Page

CPA Deerfield Beach

Although stocks have been volatile lately, they have been attractive longterm investments. The broad U.S. stock market has returned approximately 10% a year for the past 25, 30, 35, and 50 years—and that’s still true after the bear markets of 2000–2002 and 2008–2009. If you have a long time horizon and can tolerate periodic slides, you probably should hold some of your portfolio in stocks or stock funds. Investors who can tolerate stock market risks may be able to enhance returns by investing on margin, or borrowing from their broker to buy securities using their own holdings to secure the loan. Assuming that stocks continue to rise, long term, margin investing can increase your exposure and your overall gains. You shouldn’t overlook the risks of margin investing, but you also should realize that tax advantages may push your investment results toward the plus side.

Double play

When you invest on margin, you borrow money to buy securities. Once you set up a margin account with your brokerage firm, the firm will lend you money, secured by your holdings there. Base interest rates on margin loans might be in the 6%–7% rangenow, but you can pay more or less if you have a small or large account with the firm. Interactive Brokers is notably cheap. Here is a cheaper firm


DEBIT BALANCE INTEREST RATE
$0 – $49,999 2.00% + 1.75% (3.75%)
$50,000 – $99,999 2.00% + 1.00% (3.00%)
$100,000 – $249,999 2.00% + 0.50% (2.50%)
$250,000 – $499,999 2.00% (2.00%)
$500,000 – $999,999 2.00% – 0.50% (1.50%)
$1,000,000 + 2.00% – 0.75% (1.25%)

Typically, the maximum margin allowed on stocks is 50%. By borrowing, say, $50,000 on margin, you can buy as much as $100,000 worth of stocks. Then you’ll stand to gain or lose twice as much as you would if you had not invested on margin.

Where do the tax benefits come in? The interest you pay on a margin  loan may be tax deductible (see the Trusted Advice column “Deducting
investment interest” for more information).

Example: Say you get a margin loan at a 6.5% interest rate, and your effective tax rate (federal, state, local) is 35%. With a 35% tax deduction,
your net borrowing cost is 4.225%: 65% of 6.5%. If your after-tax investment returns from the assets bought on margin top 4.225%, you’ll benefit from using the margin loan. Based on long-term stock market results, investing on margin can be a reasonable strategy for those who can
tolerate the risk.Moreover, the tax savings from deducting margin interest come right away. For many stock market investors, substantial taxes are deferred for many years, until they sell the shares, and favorable long term capital gains rates may apply. Although the numbers may seem favorable, don’t downplay the risks involved with investing on margin. If your investments lose value, you may get a margin call—a demand for more cash or securities in your brokerage account. If you don’t provide the cash or securities that your broker requires, the firm can sell securities from your account and use the proceeds for loan repayment.
One way to reduce this risk is to use less margin—20% or 30%, perhaps, instead of 50%. You’ll own less stock, but you’ll also have less chance of
receiving a margin call.

 

www.safeharboraccounting.com

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Get the most benefit from retirement plans

What do you want to be when you retire?

You and your friends may have asked each other a similar question in high school. No matter what your age is now, looking ahead to the future is important — and the retirement plans you participate in have a big impact on that future.
Here are tips for getting the most benefit from retirement plans.

  • Maximize your contributions.For 2012, the maximum amount you can contribute to your 401k plan when you’re under age 50 is $17,000. If the plan allows catch-up contributions, which are available when you’re age 50 or above, you can contribute an additional $5,500.For SIMPLE plans, the maximum amount you can contribute for 2012 is $11,500 before catch-up contributions. The maximum catch-up contribution for a SIMPLE plan is $2,500.How you benefit: Contributions are not subject to federal income tax, so amounts you put in your retirement plans reduce your taxes. In addition, income earned in the plan is not taxed until you begin taking withdrawals.
  • Take advantage of employer matching contributions.The contribution limits mentioned above do not include amounts your employer can add to your account. “Matching” contributions are based on a percentage of your wages, and can raise the annual maximum contribution limit to as much as $50,000 for 2012.What’s the benefit? Matching means when you designate a certain amount from each paycheck as a plan contribution, your employer contributes, or matches, that amount up to a limit set by your plan documents. The result? Your retirement savings grow faster at no current cost to you.
  • Another wise retirement plan move: Participating in all plans available to you, such as opening an Individual Retirement Account in addition to your 401(k) or SIMPLE.

Give us a call for more information about your retirement plans. We’re here to help you maximize the benefits you receive, both today and in the future, so you can achieve the life you envision in retirement.

 

http://safeharboraccounting.com/

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Finding a New Job Can be Tax Deductible

CPA Deerfield Beach

CPA Deerfield Beach

 

 

Don’t miss this often overlooked deduction

With continued turmoil in the job market, the number of people searching for work continues to be at a high level. Because of this, the amount of time it takes to find a new job can be long and expensive. Don’t overlook the ability to deduct qualified job hunting expenses on your tax return. Here is what you need to know.

Background

If you are searching for a new job in your present line of work, you may take qualified job search expenses as a miscellaneous itemized deduction on Schedule A of your tax return. When combined with other miscellaneous expenses you may deduct any amounts over 2% of your Adjusted Gross Income. Think you may not have sufficient expenses? Think again, especially since your income may be temporarily lower as you transition into a new position. To qualify you must pass three hurdles;

  • The new position must be in the same line of work. There is leeway here, but if you decide accounting is not for you and you wish to become a doctor, the expenses do not qualify.
  • There can be no substantial gap in time. If you are out of the workforce for a long period of time AND have not been looking for a job, you run the risk of having the expenses disallowed. So keep up activity to defend your deduction.
  • Sorry recent graduates, this deduction is not for you. It only qualifies for obtaining a new job in your present line of work.

Qualifying Expenses

The following expenses are usually deductible even if you don’t end up with the job:

  • Costs to prepare your resume, letters, and other correspondence. This includes the cost of printing stationery and paying for someone to help you organize your resume.
  • Fees to employment agencies, recruiters, and consultants
  • Advertisements in newspapers and trade magazines
  • Transportation to interviews including out-of-town lodging
  • Meals while out-of-town related to the job hunt (subject to 50% deductibility)
  • Telephone expenses. This includes job hunting related cell phone use.
  • Other related expenses. This can be things like printer cartridge ink for printing your correspondence or parking fees.

If the expense can be directly related to your job hunt, document it.

Documentation

Keep track of all your job related expenses to substantiate your deductions. Here are some hints:

  1. Keep a log of your activities. A small note book or calendar can be a handy tool to log your activities.
  2. Keep receipts and canceled checks. You’ll need to document the deductibility of your expenses.
  3. Keep copies of job ads. This will help you defend the search is in your present line of work.
  4. Keep potential employer letters. This will show that your expenses are legitimate.

Don’t forget to keep track of other miscellaneous expenses to help cross your 2% threshold. Once the threshold is met, each incremental dollar could result in a reduction in your taxes. Other common miscellaneous deductions include; union dues, continuing education related expenses, uniforms, special work clothing, expenses for the production of income, tax preparation fees, and hobby expenses.

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