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Donating Your Car
You have probably heard charities asking you to donate your old car to
charity. The charity will sometimes state that "you can save more in
taxes than the car could be sold for." This is nonsense! Any
charitable donation is limited to the fair market value of the item
donated. A donation of $250 or more must be substantiated by a
contemporaneous acknowledgement from the charity describing the item
donated. A donor may use an established used car pricing guide to
determine fair market value of a single donated car if the guide lists the
sale price for the car that is the same make, model, year and sold in the
same condition as the donated car. If the market value is $5,000 or
more, you need a written appraisal from a certified appraiser. Since
you can only deduct the fair market value of the car, and the tax rate is
less that 39%, it is impossible to save more in taxes than you could sell
the car for. If you have a car that you do not want anymore and you
wish to help your favorite charity, then by all means go ahead and donate
your car. Be sure to keep all of the proper papers.
Social Security
The SENIOR CITIZENS' FREEDOM TO WORK ACT
has allowed many senior citizens to work and still collect retirement
benefits from Social Security. Seniors who are under full retirement
age, will have their benefits reduced $1 for every $2 earned.
In the year a senior reaches full
retirement age, the benefits are reduced by $1 for every $3 earned over
$30,000 for 2002 and $30,720 for 2003.
The Social Security wage base is $84,900
for 2002 and $87,000 for 2003.
If this isn't complicated enough,
seniors will have to pay federal income tax on their Social Security if
the sum of their adjusted gross income, tax-exempt interest, and one-half
of the Social Security benefits exceed $25,000 for a single taxpayer and
$32,000 for married taxpayers who file joint returns.
Sale of Home
The IRS has proposed regulations that
will expand the exclusion of the gain from the sale of your principal home
that you lived in for at least 2 out the last 5 years. These
proposed regulations will allow for partial exclusion for sales due to
"unforeseen circumstances." The IRS defined this term as
condemnation, seizure, involuntary conversions, disasters, acts of war or
terrorism, death in the family, becoming eligible for unemployment, change
in employment of self-employment status, divorce, multiple births or loss
of income. The IRS will also allow two or more unmarried taxpayers
who share the same residence to use this exclusion up to $250,000 based on
"each taxpayer's interest" in the property.
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Office at Home
The IRS has issued proposed regulations
that will eliminate a huge tax that has kept many home-based workers from
claiming the office at home deduction. When taxpayers sell their
principal home the exclusion from tax did not apply the the office at home
area. For example, if a taxpayer had a home that cost $245,000 with
$50,000 value of the land, the taxpayer could depreciate the balance of
$195,000 over 39 years. If the taxpayer used 10% of his home for
business the deduction would be $500 per year. In the third year,
the taxpayer sell his home for $350,000. Under the old rules 90% of
the sale would be for the sale of the residence and tax-free. The
remaining 10% of $35,000 would be for the sale of the office, resulting in
a total gain of $11,500 ($35,000 - [$25,000 - $1,500]). This would
result in a taxable capital gain of $10,000 and ordinary income of $1,500.
For most taxpayers this would result in an additional tax of $2,375.
Under the new rules there would be no capital gain and the ordinary income
would equal the depreciation after May 6, 1997. These new rules
do not apply to a home office that is located in a separate building
from the home.
In addition, if your are self-employed,
the home office deduction reduces your self-employment tax as well as your
income taxes. The recapture is only subject to income taxes.
Therefore, the self-employed save 43% by taking the deduction and repay
only 25% when they sell. These rules are retroactive to 1999, 2000,
and 2001.
If you determine that you use your
office at home exclusively and regularly and as your principal
place of business, or as a place where you meet, not just talk to
over the phone, customers, clients, and patients, or as the sole fixed
location of the taxpayer's business that sells products and stores these
products at his home, please contact us to determine if you should amend
you prior years returns.
The principal place of business test is
met if: the office is used by the taxpayer to conduct administrative
or management activities to the taxpayer's trade or business and
there is no other fixed location trade or business where the taxpayer
conducts substantial administrative or management activities of that trade
or business. Family members walking through the home office enroute
to another room will not violate the exclusive use test. However, if
family members watch television in the home office, the exclusive use rule
will not be met.
The home office deduction cannot put
your trade of business into a loss, but it can reduce your profit to zero.
These rules are detailed and complex and
will increase your chance of being audited. If you wish to explore
the option of filing amended tax returns, please contact our offices.
James E. Newland, CPA
939 Center Road
Eastlake, Ohio 44095
440-951-9799
Service@NewlandCPA.com
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