Sunday, December 24, 2006


Your home may not only be your castle, but it may be loaded with tax deductions and credits that might be overlooked. My home (see picture) has an office that gives me several pretty good deductions. And a home office isn’t the only tax benefit available

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Link to TAX MAN:
Link to other personal finance information

A shareholder in an S Corp can deduct Home office expense, assuming he receives reasonable wages from his S Corp. The deduction goes on Schedule A subject to the 2% of Adj Gross income limitation. You canNOT deduct home office expenses if your employer pays you rent for your use of the home office.
To deduct a home office, it must be your principal place of business. You can deduct a percent of mortgage interest, taxes, utilities, repairs, depreciation, insurance based on the ratio of sq ft used as an office and the total sq ft of the home (unless you use it for day care which allows more). It must be used exclusively and regularly as a place of business. If you are an employee you get a deduction IF it is for the convenience of the employer and he does not pay you rent.

If you are an employee, expenses-- other than interest and taxes-- are deducted as a miscellaneous deduction and reduced by 2% of your adj gross income. But an employee deducts ALL allowable interest and taxes on lines 6 and 10 of Schedule A without the 2% reduction.

If you are self-employed part of the tax and interest is deducted as a business expense and the remaining percent of tax and interest --not deducted based on sq ft of the office-- can be deducted as an itemized deduction on Schedule A. A self-employed person does not have to reduce his expenses by 2% of adj gross income, since it is taken as a business expense.

WHERE TO DEDUCT HOME OFFICE EXPENSE: An employee would use Form 2106 for employee business expense including the office expense and would enter the total from Form 2106 on line 20 of Schedule A. A self-employed person would enter his home office expenses on Form 8829 and the total would be reported on Schedule C. A home office expense cannot lower your business income to a negative amount; i.e. it cannot create or increase a business loss, but can be carried forward to offset future profits.

Mortgage interest on your home minus any portion deducted as a business expense is deductible on Schedule A as an itemized deduction. The deductible interest must be on your main home or a second home (not a third home). Acquisition debt, refinanced debt, home equity debt and debt for substantial improvements are allowable with certain limitations. Limitations may apply if the Acquisition debt and refinanced debt is over $ 1 million ( ½ million if filing separately). Home equity debt on the combined first and second home is limited to $100,000 ($50,000 if filing separately) but cannot exceed the Fair Mkt value of the first and second home MINUS acquisition debt. Substantial improvement debt is considered acquisition debt.
If you borrow against your home to pay for business expenses, e.g. if you are self-employed, then you can elect to deduct the interest as a business expense instead of as an itemized deduction.
Any part of property tax on your home not deducted as a business expense can be deducted as an itemized deduction. Any other real estate taxes on property other than you home is also deductible as an itemized deduction (but not as part of your home office expense).
Residential Energy credits can be taken in 2006 and 2007 for
energy-efficient improvements. There is a lifetime limit of $ 500 to these credits. This credit goes on Line 52, Form 1040.
Mortgage insurance premiums can be taken by first-time home owners if you acquire the home in 2007. Does not apply to your 2006 taxes. BUT you may be able to deduct part of this insurance as a home office expense in 2006.

Link to IRS forms and publications:
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This information is not intended to be advice to the recipient.In compliance with Treasury Department Circular 230, unless stated to the contrary, any Federal Tax advice contained in this Blog was not intended or written to be used and cannot be used for the purposes of avoiding penalties.


Jim Howard said...

"Mortgage insurance premiums can be taken by first-time home owners if you acquire the home in 2007."

Is this a one time thing for 2007, or do you expect it to continue into the future?

taxxcpa said...

Here is everything from my source of information. The last paragraph seems to imply that it will expire at the end of 2007,but it is likely that congress will extend it, especially if the housing market is not doing too well.

Mortgage Insurance Premiums

Beginning in 2007, premiums paid for qualified mortgage insurance in connection with acquisition indebtedness on a qualified residence is treated as deductible mortgage interest. The deduction is phased out ratably by 10% for each $1,000 by which the taxpayer’s AGI exceeds $100,000 ($500 and $50,000 respectively for MFS). Thus the deduction is not allowed when AGI exceeds $110,000 ($55,000 MFS).

For this purpose, qualified mortgage insurance means mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance.

Amounts paid for qualified mortgage insurance that are properly allocable to periods after the close of the taxable year are treated as paid in the period to which they are allocated. No deduction is allowed for the unamortized balance if the mortgage is paid before its term (except in the case of qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Administration).

Effective dates. This deduction does not apply with respect to any mortgage insurance contract issued before January 1, 2007. The provision terminates for any amount paid or accrued after December 31, 2007, or properly allocable to any period after that date.