Tax Savings Strategies

A taxpayer may usually deduct 14 cents per mile for all miles driven on behalf of a charity (Section 170(i)). The primary purpose of the travel must be to contribute to the mission of the charity. In addition, the travel must not provide the taxpayer with any significant amount of personal pleasure, recreation, or vacation (Section 170(j)). Further, a taxpayer may not deduct the miles driven on behalf of a charity, other than a church, if the purpose of the travel is to influence legislation (Section 170(f)(6)).

For example, if a taxpayer drove her personal automobile a total of 500 miles to procure and distribute wheelchairs on behalf of a qualified charitable organization such as LifeNets http://www.lifenets.org/, the taxpayer could deduct $70.00 (500 miles x 14 cents per mile). However, if a scoutmaster took a troop of Boy Scouts to summer camp and spent a week there with them, the scoutmaster may not deduct the miles because the trip to the summer camp has a significant element of personal pleasure, recreation, or vacation.

For miles for miles driven for relief efforts related to Hurricane Katrina after August 25, 2005, through December 31, 2006, a taxpayer may deduct 70 percent of the standard mileage rate in effect for business miles If a taxpayer receives a reimbursement from a charity for miles driven for relief efforts related to Hurricane Katrina after August 25, 2005, through December 31, 2006, the taxpayer may exclude the reimbursement from gross income up to 100 percent of the standard mileage rate for business miles.

The standard mileage rate for business miles was 40.5 cents per mile from August 25, 2005, through August 31, 2005. The standard mileage rate for business miles increased to 48.5 cents per mile from September 1, 2005, through December 31, 2005. The standard mileage rate for business miles driven in 2006 is 44.5 cents per mile (Rev. Proc. 2005-78).

If a taxpayer does not receive any reimbursement from a charity for miles driven for relief efforts related to Hurricane Katrina, the taxpayer may deduct 29 cents per mile for miles driven from August 25, 2005, through August 31, 2005; 34 cents per mile for miles driven from September 1, 2005, through December 31, 2005; and 32 cents per mile for miles driven in 2006 (Rev. Proc. 2005-78).

If a taxpayer receives reimbursement from a charity for miles driven for relief efforts related to Hurricane Katrina, the taxpayer may exclude from gross income up to 40.5 cents per mile for miles driven from August 25, 2005, through August 31, 2005; 48.5 cents per mile for miles driven from September 1, 2005, through December 31, 2005; and 44.5 cents per mile for miles driven in 2006 (Rev. Proc. 2005-78).

In addition to the standard mileage rate, a taxpayer may deduct the cost of parking fees and tolls incurred while driving an automobile on behalf of a qualified charitable organization (Rev. Proc. 2005-78).

If a taxpayer has any doubt about the status of an organization as a qualified charity, the taxpayer may consult IRS Publication 78 at the IRS Web site: http://www.irs.gov/.

A taxpayer claims the deduction for miles driven on behalf of a charity on Schedule A of Form 1040. The deduction for miles driven on behalf of a charity is included with the amounts for cash contributions on the same line of Schedule A of Form 1040.

A taxpayer should have good records such as a mileage log to document the deduction. The burden of proof is on the taxpayer to prove the amount of all deductions claimed.

If the taxpayer's total itemized deductions do not exceed the standard deduction amount, the taxpayer will usually not receive any benefit from the deduction for miles driven on behalf of a charity.

Many people are buying a second home. They might do so to have a vacation home with the possibility of selling it at a substantial gain in the future. Another reason people buy a second home is to use it in the future as a primary home, perhaps in retirement. They might prefer to purchase the second home now to avoid the possibility of having to pay considerably more for it in the future.

What are the tax benefits and potential tax pitfalls in purchasing a second home? The first benefit is that the real estate taxes on a second home are deductible as an itemized deduction. However, a potential pitfall exists if the taxpayer is subject to the alternative minimum tax (AMT). Real real estate taxes are not deductible for AMT purposes.

The mortgage interest is also deductible as an itemized deduction on mortgage loans up to a maximum of $1,000,000 on loans used to acquire, construct, or substantially improve the taxpayer's primary home and the taxpayer's second qualified home. A refinancing of acquisition debt is considered acquisition debt to the extent that it does not exceed the balance before refinancing.

Another tax benefit for owning a second home is that the taxpayer may deduct interest on home-equity loans up to a maximum loan amount of $100,000. A home-equity loan is considered as an acquisition debt if the taxpayer uses it to make a substantial improvement to the primary home or second home. The loans may be secured by the primary residence and/or the second home. For tax purposes, a home-equity loan includes the excess of the balance of a refinanced acquisition loan over the balance before the refinancing unless the taxpayer uses the excess to make a substantial improvement to the home.

A tax pitfall is that the interest on a home-equity loan is generally not deductible for AMT purposes. An exception applies if the taxpayer uses the proceeds of the loan of the loan to make a substantial improvement to the property.

If a taxpayer rents a second home to a tenant for 14 or fewer days during the year, the rent income is not taxable. The taxpayer may still deduct the real estate taxes. The taxpayer may deduct the qualified mortgage interest as long as the taxpayer used the second home for personal purposes for a number of days that exceeds the greater of 14 days or 10 percent of the number of days the taxpayer rented the house to a tenant at a fair rental. If the taxpayer does not meet this test, the second home might be considered as rental property.

A potential tax pitfall on a second home is that any gain on the sale of a home that is not the taxpayer's principal residence is taxable. It would be taxable as a capital gain because a personal use asset such as a second home is a capital asset.

The exclusion of gain up to $250,000 ($500,000 on a joint return) on the sale of the taxpayer's home applies only to the sale of a home that that the taxpayer owned and used as the taxpayer's principal residence for at least two of the five years before its sale. A taxpayer may have only one principal residence at a time.

A good tax savings strategy would be for the taxpayer to sell the primary home and exclude the gain up to the limit. Then, the taxpayer would move into the second home and use it as a primary residence for at at least two of the five years before the taxpayer sells it. By doing so, the taxpayer could use the exclusion of gain provision on both homes. The potential to exclude the gain on the sale of both homes up to the limit using this strategy is a major tax benefit.

Another potential tax pitfall on owning a second home is that any loss on the sale of a home used as the taxpayer's residence, whether as a primary home or as a second home, is not deductible because the loss is on the sale of an asset used for personal purposes.

An individual should consider many factors before buying a second home, such as cost, convenience, and potential gain. The tax benefits and potential tax pitfalls are some other key factors to consider before buying a second home.

A new business owner incurs start-up costs before beginning the business. Under Section 195(c)(1), start-up costs are costs the taxpayer incurs to investigate the creation or acquisition of a business or in creating a business. The costs must be costs that would be deductible as an ordinary and necessary business expense if the taxpayer was actively conducting the business.

In general, a taxpayer may not deduct start-up costs until the taxpayer sells the business. That is the default rule of Section 195(a). However, for start-up costs paid or incurred after October 22, 2004, a taxpayer may elect to deduct start-up costs to the extent allowed by Section 195(b)(1)(A). Under Section 195(d)(1), a taxpayer has until the due date of the tax return, including extensions, to make the election.

A taxpayer makes the election by claiming the deduction on the appropriate form. For example, a taxpayer who is a sole proprietor would claim the deduction on Schedule C of Form 1040. The taxpayer should attach a statement to the form showing the start-up costs for which the taxpayer is making the election.

If a taxpayer failed to make the election when the taxpayer filed a timely tax return, the taxpayer has six months to file an amended return and make the election under Regulations Section 301.9100-2(b). The IRS has no authority for allowing any other late elections.

If the taxpayer elects to deduct start-up costs, the taxpayer may deduct up to $5,000 of startup costs in the year the taxpayer begins the active conduct of the business. If the new business owner determines that start-up costs might exceed $5,000, the business owner might want to do what is necessary to begin the active conduct of the business more quickly. By doing so, more of the costs would be ordinary and necessary business expenses rather than start-up costs.

However, if the start-up costs exceed $50,000, the $5,000 limit on the deduction for start-up costs is reduced by the amount by which start-up costs exceed $50,000. For example, assume that the start-up costs are $52,000. The taxpayer may claim an immediate deduction of $3,000 [$5,000 - ($52,000 - $50,000)]. If the start-up costs are $55,000 or more, the taxpayer may not deduct any of the start-up costs in the year the taxpayer begins the active conduct of the business except as an amortization deduction as explained below.

The taxpayer may deduct the remaining start-up costs ratably over 180 months beginning in the month in which the taxpayer begins the active conduct of the business under Section 195(b)(2). For example assume that a taxpayer's start-up costs were $23,000. The taxpayer may deduct $5,000 immediately. In addition, the taxpayer deducts the remaining $18,000 of start-up costs at the rate of $100 a month [($23,000 - $5,000) / 180].

The ratable deduction of start-up costs over 180 months is called an amortization deduction. A taxpayer claims an amortization deduction on Form 4562 and then carries the total deductions on Form 4562 to the appropriate form.

If the taxpayer sells the business before deducting all of the start-up costs, the taxpayer may deduct the remaining start-up costs as a loss as allowed by Sections 165 and 195(b)(2).

A taxpayer should take advantage of these rules to ensure the highest possible tax deductions. Because the time for making the election is quite limited, a taxpayer should be sure to make the election in a timely manner.

A taxpayer can avoid the tax on long-term capital gains by donating the property to a recognized charity. If the sale of the property would result in a long-term capital gain, but the taxpayer donates the property to charity, the taxpayer avoids the tax on the long-term capital gain and also receives a charitable contribution deduction equal to the fair market value of the property at the time of the donation.

A long-term capital gain occurs when the taxpayer sells or exchanges a capital asset that the taxpayer has held for more than one year for an amount that exceeds the asset's adjusted basis (usually cost). Most long-term capital gains are taxed at a maximum rate of 15 percent. This rate is much lower than the maximum 35-percent rate that applies to ordinary income.

However, a taxpayer can avoid even the 15-percent tax rate on a long-term capital gain by contributing the property to a recognized charity. In such a case, the taxpayer does not have to recognize the gain. In addition, the taxpayer may deduct the fair market value of the property as a charitable contribution.

For example, assume that a taxpayer bought land for investment two years ago at a cost of $6,000. The land is now worth $16,000. The taxpayer donates the land to a recognized charity. The taxpayer does not have to recognize the $10,000 ($16,000 - $6,000) long-term capital gain. In addition, the taxpayer may deduct $16,000 as a charitable contribution.

The deduction for charitable contributions of an individual is generally limited to 50 percent of the taxpayer's adjusted gross income (AGI). However, for contributions of long-term capital gain property, the limit is 30 percent of the taxpayer's AGI unless the taxpayer elects to deduct only the adjusted basis of the property rather than its fair market value.

The taxpayer may carry over any charitable contributions that exceed the annual limit to the next five tax years. The current year's contributions are deducted before any contributions carried over from a prior year.

If the property is tangible personal property, such as a work of art the taxpayer had purchased, the charitable contribution deduction is limited to the taxpayer's adjusted basis in the property. The taxpayer may not deduct the fair market value of such property if it exceeds the property's adjusted basis. In addition, the deduction for contributions of property to private nonoperating foundations is limited to the adjusted basis of the property.

If the property is ordinary income property or property the sale of which would result in a short-term capital gain, the deduction is also limited to the adjusted basis in the property. However, the taxpayer would not have to recognize the appreciation as a gain.

Taxpayers should not donate property to charity on which they would realize a loss if they sold the property. The deduction for the charitable contribution would be limited to the fair market value of the property, and the taxpayer would not recognize the loss. The taxpayer would achieve a more favorable tax result by selling the property to realize the loss and contributing the cash proceeds to the charity. Of course, losses on the sale of personal use assets such as clothing are not recognized.

While the deduction of net capital losses of an individual or married couple is limited to $3,000 a year, the taxpayer may carry over any unused net capital losses to future tax years indefinitely.

The ability to contribute long-term capital gain property to a charity to avoid the tax on the long-term capital gain while deducting the fair market value of the property as a charitable contribution is a great tax planning strategy. Taxpayers who want to contribute to charity should seriously consider using this strategy.

However, the tax law has numerous exceptions and limitations. Therefore, a taxpayer should consult a competent tax professional before donating any significant amounts of property to a charity.

The income of a newspaper carrier who is under age 18 is not subject to the self-employment tax (Sections 1402(c)(2)(A) and 3121(b)(14)(B)). This rule also applies to carriers of magazines who are under age 18.

The carrier must distribute the newspapers or magazines to the ultimate consumer for a fixed price. The compensation of the carrier must be based solely on the difference between what the price the carrier sells the newspapers or magazines to the consumer and their cost to the carrier.

The newspaper or magazine may guarantee a minimum amount of compensation to the carrier or credit the carrier with unsold and/or returned newspapers or magazines. The newspaper or magazine may not pay the carrier an hourly wage or a fixed salary. A written contract must provide that the newspaper or magazine will not treat the carrier as an employee for federal tax purposes.

If a teenager makes over $400 in adjusted net income from most other self-employment activities, the teenager would be subject to self-employment tax. The self-employment tax rate is 15.3 percent. The adjusted net income from self-employment is the net income from the business multiplied by 92.35 percent. Therefore, to have a self-employment tax liability, the net income from the activity must exceed $433.13 ($400 / 0.9235).

Once the self-employment income exceeds this amount, the self-employment tax rate applies to it until the amount of the self-employment income reaches the maximum amount for the 12.4 percent old age, survivors and disability insurance (OASDI) portion of the self-employment tax. This maximum amount is $94,200 for 2006. Because this amount represents the amount after multiplying the net self-employment income by 92.35 percent, the unadjusted amount of self-employment income subject to the OASDI portion of the self-employment tax is $102,003.24 ($94,200 / 0.9235).

The unadjusted self-employment income is the amount of the net income reported on Schedule C of Form 1040 (Schedule F for a farmer). No ceiling applies to the 2.9 percent portion of the self-employment tax for Medicare purposes.

The exemption from the self-employment tax for newspaper or magazine carriers who are under age 18 makes the choice of doing such work more attractive to such teenagers who need a part-time or summer job.

Taxpayers may request an automatic extension of time to file their individual income tax returns on Form 4868. The form is available on the IRS Web site. In previous years, the automatic extension was good for four months. Taxpayers could request an additional extension of two months by filing Form 2688 and stating a good reason why they needed the additional two months. This year the IRS decided to eliminate the time and cost necessary to process these second extension requests by allowing an automatic six-month extension to taxpayers who request it on Form 4868.

Taxpayers who would like an extension must file Form 4868 by the regular due date of their individual income tax returns. This year the regular due date for 2005 individual income tax returns is April 17 because April 15 is on a Friday. In a few states, taxpayers have until April 18 to file their tax returns or application for automatic extension because of Patriot Day. Special rules apply to taxpayers who are out of the country on the due date. The instructions that come with Form 4868 have the details.

Taxpayers may e-file their extension request using tax preparation software or a service provided by a tax preparer. Taxpayers may also mail Form 4868, but a taxpayer should not e-file Form 4868 and also mail it. The address where a taxpayer should mail Form 4868 is on the instructions to Form 4868.

If a taxpayer mails the extension request, using certified mail, return receipt requested is always a good idea. The taxpayer should staple the green and white certified mail receipt from United States Postal Service on the copy of Form 4868. When the green return receipt card arrives from the IRS in the mail, the taxpayer should also staple it to the copy of Form 4868 and file carefully so that the taxpayer could prove to the IRS that the extension request was filed timely in case they challenge it.

The taxpayer does not have to sign Form 4868 or send any payment with it. However, a taxpayer must make a bona fide estimate of the taxpayer's tax liability for 2005 and show any payments already made such as through withholding and estimated payments. If a taxpayer does not make a bona fide estimate of the tax liability, the IRS may disallow or revoke the extension.

A taxpayer may send a payment with the extension request. If the taxpayer e-files the request, the taxpayer may send a payment by electronic funds transfer or credit card. If a taxpayer mails the extension request, the taxpayer may include a check or money order. Checks should be made payable to "United States Treasury." The taxpayer should write "2005 Form 4868" on the check or money order. The check or money order should not be stapled or attached to Form 4868.

Taxpayers should not attach a copy of Form 4868 to their returns. Taxpayers who obtain an extension should file their returns by the extended due date of October 15. Taxpayers who fail to do so are subject to the penalty for failure to file a timely return unless they have reasonable cause.

The penalty for failure to file a timely return is five percent per month or part of a month on the net tax due for each month the taxpayer files the return late. The maximum penalty for failure to file a timely return is 25 percent. If the taxpayer with an extension does not file the return by the October 15 extended due date, the calculation of the penalty for failure to file a timely return begins after April 17, not after October 15. Therefore, the taxpayer would be subject to the maximum penalty for failure to file a timely return of 25 percent of the net tax due.

If there is a balance due with the return, the IRS will charge interest from the original due date of April 17. In addition, the taxpayer will be subject to the failure to pay penalty unless the taxpayer has paid in at least 90 percent of the tax due by the original due date or has reasonable cause. The penalty for failure to pay is one half of one percent per month or part of a month on the net tax due beginning after the original due date (April 17 in 2006). The maximum failure to pay penalty is 25 percent of the net tax due.

Filing an extension request can be a good tax savings strategy for some taxpayers. The tax law allows taxpayers until the extended due date to make a number of tax elections. For example, if a taxpayer is self-employed, the taxpayer has until the extended due date to set up a Simplified Employee Pension (SEP) plan, fund it, and attribute the contribution to the previous tax year. However, a taxpayer has only until the regular due date of April 17 to set up a traditional IRA.

Filing an application for automatic extension can save taxpayers from the penalty for failure to file a timely return if they do not have their return prepared by the regular due date. An extension also allows a taxpayer more time to decide whether to make a number of different tax elections. In past years, the automatic extension was good for four months. This year the IRS allows an automatic extension of six months for taxpayers who file Form 4868 by the regular due date and make a bona fide estimate of their tax liability.

Sometimes a taxpayer will receive Social Security benefits in one lump sum. A taxpayer might have to pay income taxes on up to 85 percent of these benefits. However, a taxpayer may make an election under Section 86(e) of the Internal Revenue Code to minimize the income tax on the receipt of the lump-sum Social Security benefits.

Why would a taxpayer receive lump-sum Social Security benefits? A taxpayer could have been receiving Supplemental Security Income (SSI), which is tax free. Then, the Social Security Administration determines that the taxpayer should have been receiving Social Security disability benefits for the last several years instead of SSI. Another reason that a taxpayer could receive Social Security benefits in one lump sum is that the Social Security Administration may have initially denied the individual's application for Social Security disability benefits, but the individual wins those benefits on appeal.

Social Security benefits are not taxable for taxpayers with relatively low amounts of adjusted gross income. At moderate levels of adjusted gross income, 50 percent of the Social Security benefits are taxable. At high levels of adjusted gross income, 85 percent of Social Security benefits are taxable.

This graduated system for including Social Security benefits in gross income and the progressive nature of income tax rates can have a very bad effect on individuals who receive lump-sum Social Security benefits. Such individuals might have to pay a much larger amount of income taxes than they would have if they had received the Social Security benefits when they should have received them. If the taxpayer does not take action to make an election allowed by Section 86(e) of the Internal Revenue Code, that is what will happen.

Sometimes the taxpayer does not receive any cash for the lump-sum payment. For example, if the taxpayer had been receiving SSI and the Social Security Administration determines that the taxpayer should have been receiving Social Security disability benefits, the Social Security Administration will reduce the disability benefits by the amount of the SSI paid to the taxpayer. The taxpayer will receive a Form 1099-SSA showing the amount of the lump-sum Social Security disability benefits and yet the taxpayer received little, if any, cash.

Section 86(e) of the Internal Revenue Code allows a taxpayer who receives lump-sum Social Security benefits to elect to include in gross income only the sum of the Social Security benefits that the taxpayer would have included in gross income in prior years if the taxpayer had received the benefits in the years to which the lump-sum payment is attributable. A taxpayer may also make the election if the taxpayer received Railroad Retirement benefits in one lump sum.

Section 86(e)(2)(B) states that the taxpayer should make the election in the manner prescribed by the Secretary of the Treasury in regulations. However, the Secretary of the Treasury has not issued any regulations under Section 86. Once a taxpayer makes the election, the taxpayer may not revoke it with the consent of the IRS.

Because no regulations exist that prescribe the manner of the election, a taxpayer should make the election according to the guidance the IRS provides in IRS Publication 915, "Social Security and Equivalent Railroad Retirement Benefits." IRS Publication 915 has helpful worksheets and other information about making this election. Taxpayers who received Social Security benefits or Railroad Retirement benefits in one lump sum should consult IRS Publication 915 and determine whether the election will reduce their taxes.

A point on a mortgage loan is one percentage point of the loan. For example, two points on a $200,000 mortgage loan would be $4,000 ($200,000 x 2%). Points represent prepaid interest.

A taxpayer who uses the cash method of accounting may deduct points paid on a loan to buy or improve a principal residence as long as the points are a normal business practice in the area, are reasonable in amount, and the loan is secured by the residence (Sections 163(h)(3)(B) and 461(g)(2)). Interest, including points, on a loan to acquire or improve the taxpayer's residence is limited to the interest on the first $1,000,000 of the mortgage loan.

The limit on deductibility of interest on a loan to acquire a residence applies to the taxpayer's principal residence and one other residence (Section 163(h)(4)(A). However, a taxpayer may deduct points paid in the year paid only in connection with a mortgage loan on the taxpayer's primary residence (Section 461(g)(2)). If a taxpayer pays points on a mortgage loan to purchase a second home, the taxpayer must amortize the points over the life of the loan.

A taxpayer claims the deduction on Schedule A of Form 1040. A buyer may deduct the points even if the seller pays them (Rev. Proc. 94-27, 1994-1 CB 613). A taxpayer who uses the accrual basis of accounting must amortize the points over the life of the loan.

If a taxpayer pays points on a home equity loan, the taxpayer may not deduct the points immediately unless the taxpayer uses the proceeds of the home equity loan to improve the property. If the taxpayer does not use the proceeds of a home equity loan to improve the property, the taxpayer must amortize the points over the life of the loan (Sections 163(h)(3)(C) and 461(g)(1)).

The deduction of interest, including points, on a home equity loan is limited to the interest on a home equity loan up to $100,000 unless the taxpayer uses the home equity loan for business purposes. If the taxpayer pays the loan off early, the taxpayer may deduct the unamortized points in the year paid (Temp. Regs. Sec. 1.163-10T(j)(3)).

The same rule that applies to a home equity loan also generally applies to a refinancing of a taxpayer's mortgage loan. The taxpayer may not deduct the points immediately. The taxpayer must amortize the points over the life of the loan. If the taxpayer pays the loan off early, the taxpayer may deduct the unamortized points in the year paid.

However, for taxpayers who live under the jurisdiction of the U. S. Court of Appeals for the Eighth Circuit, if the taxpayer pays points on a mortgage loan and uses the proceeds to pay off a short-term bridge loan, the taxpayer may deduct the points in the year paid (Huntsman v. Commissioner, 90-2 USTC Para. 50,340, CA-8, 1990, rev'g 91 TC 917). The U. S. Court of Appeals for the Eighth Circuit has jurisdiction over taxpayers in the states of Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.

If a taxpayer pays points on a mortgage loan to acquire undeveloped land, a commercial building, or rental real estate, the taxpayer must amortize the points over the life of the loan. If the taxpayer pays the loan off early, including a sale of the property, the taxpayer may deduct the unamortized points in the year paid.

Taxpayers should remember to deduct points paid in connection with a mortgage loan to purchase or improve their principal residence, whether the purchaser or seller pays the points. For points paid in connection with a refinancing of a mortgage, to obtain a home equity loan, or to obtain a mortgage loan on rental or commercial property, taxpayers should remember to deduct the points over the life of the loan and deduct the unamortized points in the year the taxpayer pays the loan.

A taxpayer who conducts an active trade or business can save income tax with the Section 179 deduction. Section 179 of the Internal Revenue Code allows a business to deduct immediately the cost of tangible, personal property that the business purchased and placed in service in a trade or business. Therefore, a taxpayer may claim the Section 179 deduction on business equipment, office furniture, and machinery used in the business. In addition, off-the-shelf computer software qualifies through 2007. However, if the taxpayer uses such assets in connection with rental real estate, they do not qualify for the Section 179 deduction.

A taxpayer must use the asset for more than 50-percent business use to claim any Section 179 deduction. If the usage is greater than 50 percent but less than 100 percent, the taxpayer may claim the Section 179 deduction on the percentage of the cost of the asset that is used for business. A taxpayer claims the Section 179 deduction by making the election on Form 4562.

This deduction reduces taxable income and therefore saves income tax. If the taxpayer is a self-employed individual, the Section 179 deduction also reduces self-employment income and therefore saves self-employment tax.

Vehicles purchased and placed in service in a business are eligible for the Section 179 deduction. However, the total deduction for depreciation and the Section 179 deduction on most vehicles is severely limited. Therefore, claiming the Section 179 deduction on car used in a business is usually not the best use of the Section 179 deduction.

However, if the taxpayer purchases and places in service a sport utility vehicle (SUV) that has a gross vehicle weight of more than 6,000 pounds, the taxpayer may claim a Section 179 deduction up to $25,000. In addition, the taxpayer may claim a depreciation deduction on the remaining cost. If a taxpayer purchases and places in service a pickup truck with a gross vehicle weight of more than 6,000 pounds, the taxpayer may claim all of the cost of the pickup as a Section 179 deduction, subject only to the annual limit and the taxable income limit as explained below.

The Section 179 deduction reduces the adjusted basis of the property. However, if the taxpayer has any cost remaining after subtracting the Section 179 deduction, the taxpayer may take depreciation deductions on the remaining cost, including in the year of purchase.

The maximum Section 179 deduction allowed in 2006 is $108,000 (Rev. Proc. 2005-70). This limit is the aggregate limit on the cost of all eligible property and not the limit on each item of eligible property. If a taxpayer purchases more than $430,000 of eligible property during 2006 (Rev. Proc 2005-70), the maximum Section 179 deduction is reduced by $1 for each $1 of the cost of eligible property over the $430,000 limit.

In addition, the Section 179 deduction is limited to the taxable income derived for any business before considering the Section 179 deduction. For this purpose, wages and salaries count as income from a business. Therefore, someone who is employed may start a part-time business and claim the Section 179 deduction even if the business makes little money or suffers a loss in the first year or two. The taxpayer may carry forward to the next tax year any Section 179 deduction that exceeds the taxable income limit. There are also special rules for certain kinds of property called listed property.

If a taxpayer disposes of property on which the taxpayer has claimed the Section 179 deduction, the Section 179 deduction is subject to recapture in the same manner as depreciation. A taxpayer reports the sale of such property on Form 4797. The recapture of depreciation and the recapture of the Section 179 deduction on a sale of the property are not subject to the self-employment tax (Section 1402(a)(3)(C)).

If the taxpayer converts the asset to 50-percent or less business use before the end of its depreciable life, however, the taxpayer must recapture part of the Section 179 deduction for income tax purposes and self-employment tax purposes. A taxpayer reports such recapture on the same form on which the taxpayer claimed the deduction. For a self-employed individual the form would be Schedule C of Form 1040 because the Section 179 deduction claimed on Form 4562 flows to Schedule C.

The Section 179 deduction is one of the best deductions allowed to a taxpayer who operates a business. Claiming the Section 179 deduction accelerates the deduction for depreciation that the taxpayer would have to claim over several years. Money does have a time value. In addition, a self-employed individual usually saves self-employment tax with the Section 179 deduction, but the recapture of the Section 179 deduction increases only income tax, not self-employment tax.

While claiming the Section 179 deduction is usually a good decision, in some cases it may not be wise. Therefore, a business owner would be wise to consult a competent tax professional before claiming the Section 179 deduction.

The tax law provides that if you rent your home for fewer than 15 days a year that the rental income is not included in your gross income (Section 280A(g)). That means that you can take a two-week vacation, rent your home while you are gone, and the rental income is not taxable. What a great way to pay for your vacation.

The tax law provides that all income is included in gross income and therefore taxable unless the item of income is specifically excluded from gross income. There are a number of these exclusions and some are commonly known such as the fact that health insurance premiums paid by your employer are excluded from your gross income. However, this exclusion for renting your home out for 14 days or fewer during the year is not as well known.

If you live near where a major sporting event, convention, or other major event is taking place, you might be able to rent your home for a large sum of money. For example, if you lived near where the Super Bowl or World Series was going to be played, you might be able to rent your home for much more than the average hotel rate in your city.

If you live in a resort area, you might be able to rent your home out during the peak tourist season when the hotels are at full occupancy. Because you may rent your home for a maximum of 14 days a year for the income to be tax free, you want to earn the highest rental rate possible.

Be sure to check with your attorney to make sure that there is no problem with zoning or other legal prohibitions for renting your home for up to 14 days a year. Local law might require that you obtain a license or collect sales or occupancy tax from the tenant. You will also want to hire a property manager to handle the rental while you are gone. You or the property manager will want to verify the tenant's references. You will also want to obtain a reasonable security deposit.

Although the rental income is not taxable if you rent your home for 14 or fewer days during the year, you may not claim any deductions attributable to the rental activity (Section 280A(g)(1)). Thus, you may not deduct property management fees, repairs, cleaning, insurance, or depreciation attributable to the rental. You may, however, deduct the mortgage interest, real estate taxes, and any casualty or theft losses as itemized deductions just as you otherwise could.

The ability to rent your home to a tenant for up to 14 days a year and have the rent income be tax free is one of the many tax benefits that the tax law allows homeowners. If you live near a major sporting event or in a resort area, this rule allows you to generate significant tax-free income each year while enjoying a nice vacation. Just be sure that the tenant understands that 14 days is the maximum term of occupancy. If you rent the home for 15 or more days during the year, all of the rent income is taxable.

Employees of a business often incur expenses on behalf of the business. The best way for the business to reimburse such expenses is to use an accountable plan as described in Regulations Section 1.62-2. If the business uses an accountable plan, the reimbursements received by the employee are not incuded in the employee's gross income. Therefore, they do not appear on the employee's Form W-2. The reimbursement is not subject to income tax withholding or payroll taxes. The employee may not deduct the reimbursed expenses. The business deducts the expenses, except that the business may generally deduct only 50 percent of business meals and entertainment.

The employee may deduct any expenses not reimbursed as a miscellaneous itemized deduction, except that the employee may generally deduct only 50 percent of business meals and entertainment. The taxpayer must reduce total miscellaneous itemized deductions by two percent of adjusted gross income. In addition, itemized deductions generally do not provide a benefit to a taxpayer unless total itemized deductions exceed the standard deduction. Therefore, the employee may receive little, if any, tax savings from the deduction.

To qualify as an accountable plan, the employee must substantiate the expenses to the employer. The employee must document the time, place, business purpose, and amount of each expense. The employee must also return any unused advances within a reasonable time.

Some businesses use nonaccountable plans. They give each employee a certain amount that the employee may spend for business purposes. The employee may or may not be able to keep any excess depending on the plan.

While a nonaccountable plan has the advantage of simplicity, it has tax disadvantages for the employer and for the employee. Under this type of expense account arrangement, any amount the employer provides to the employee is taxable as compensation. This treatment means that the employee is subject to income tax withholding, Social Security tax, and Medicare tax on the expense account. In addition, the employer is subject to payroll taxes on the amount. The employee may deduct the actual expenses incurred, except that the employee may deduct only 50 percent of business meals and entertainment.

However, the employee may not receive any tax benefit from the deduction because employee business expenses are deductible only as a miscellaneous itemized deduction. The employee must subtract two percent of the adjusted gross income shown on the return from the total miscellaneous itemized deductions. Only the excess over this reduction is deductible. The employee's total itemized deductions must generally exceed the standard deduction to provide any tax benefit. In addition, miscellaneous itemized deductions are not allowed for purposes of calculating the alternative minimum tax.

The best way to handle employee business expenses is to establish an accountable plan that complies with the requirements of Regulations Section 1.62-2. An accountable plan provides tax benefits to the employer and to the employee. These tax benefits should be greater than any increased bookkeeping burden.