Home Office Safe Harbor, Other Tax Changes

The IRS has made it easier for you to claim your home office deduction and it has increased the amount of deduction you can take for driving people to and from listings in your car. These are two of the changes that can help you save money as you prepare to file your 2013 taxes.

If you’re in a higher-income bracket, there are some additional changes you need to be aware of. Here’s a look at six changes that can affect how you prepare your taxes this year.

Simplified home office deduction
The IRS is giving you a choice in how you determine the deduction for your home office. You can calculate your deduction the way you always have, by determining the square footage of your office space, then apportioning other costs, like electricity, heating, and depreciation, based on your square footage amount. Or you can use the IRS’s new simplified method, under which you take a straight $5 per square foot deduction, up to 300 square feet, for a potential maximum deduction of $1,500.

Which method should you use? Peter Baker, a CPA based in Washington, D.C., whose client base includes many real estate brokers and sales associates, says you should run your numbers both ways and apply the calculation that’s most advantageous to you. “This method is electable on a year-by-year basis,” says Baker.

Increased mileage deduction
The IRS changes how much you can deduct for business mileage each year, based in part on whether gas prices are heading up or down. For your 2013 filing, the per-mileage rate has been increased a penny to 56.5 cents, from 55.5 cents, per mile. That doesn’t sound like a lot, but Baker points out that for every 10,000 miles you drive, that’s an additional $100 in deductions. As a real esate practitioner, you no doubt spend a lot of time in your car and those miles can add up quickly.

New bracket for higher-income households
If you’ve had a successful 2013—so successful, in fact, that you find yourself in the highest tax bracket—be prepared to pay more than you did last year. That’s because in the American Taxpayer Relief Act of 2011, Congress created a 39.5 percent bracket for taxpayers whose adjusted income is $400,000 for a single filer or $450,000 for joint filers. Last year, the highest tax bracket was 35 percent, so the increase is significant. “The good news is that, for 98 percent of taxpayers, the Bush-era tax cuts were made permanent,” says Baker. Under the Bush-era tax structure, there are six brackets, of 10, 15, 25, 28, 33, and 35 percent. The law adds the 39.5 percent as a seventh bracket to that.

3.8 percent net investment tax kicks in
In a new tax that you might already be familar with, in part because it’s received so much attention in the media, is the new 3.8 percent tax on net investment income, which takes effect for your 2013 filing. The tax was enacted as part of the big health insurance reform law passed in 2010 and rumors have swirled around on the Internet and elsewhere since then that the tax amounts to a transfer tax on real estate, but although a small percentage of some home sales can trigger the need to see if you meet the tax threshold, it is not a real estate transfer tax.

Under the tax, households with adjusted gross income of $200,000 for a single filer or $250,000 for joint filers are potentially subject to the tax if they have a certain level of investment income. Calculating the tax can be complicated and is best done with the assistance of a professional tax advisor, but, in short, if your income meets the threshold level and, on top of that, you have non-earned, or investment, income, including net rents and capital gains (including from the sale of a principal residence), you need to do a series of calculations to see if you owe anything under this new tax.

On a positive note, with the sale of a principal residence, you have the added factor of the $250,000 to $500,000 capital gains exclusion, which is key in determining whether the tax would apply to you. Briefly, if you sold your house for a gain of more than $500,000 (that’s gain, not sales amount), then you automatically deduct the $500,000 capital gains exclusion from your gain ($250,000 for a single filer). That means if your gain was, say, $530,000, only $30,000 is considered investment income under the tax.

There are other factors to be considered, but when all is said and done, how much tax you owe, if any, is based on how much net investment income you have compared to your adjusted gross income threshold. You apply the tax to whichever is less, your investment income or your income threshold. So, if your adjusted income threshold is $250,000 and your net investment income is, say, $30,000, you apply the 3.8 percent tax to the $30,000, whch would one out to around $950 in tax.

0.9 percent Medicare tax
The health reform law also created a 0.9 percent Medicare tax, also known as the “additional Medicare tax,” because it sits on top of the existing 2.9 percent Medicare tax, which applies to your wages, compensation, or self-employment income. The additional tax is based on a threshold amount for your filing status, generally $200,000 for a single filer and $250,000 for joint filers. Thus, if your income is at that threshold, your Medicare tax is raised to 3.8 percent, not to be confused with the 3.8 percent net investment income tax.

Individual mandate penalty
Another important change concerns the year 2014 but not your 2013 tax filing, and that’s the fee the federal government will impose on you if you don’t have health insurance by March 31 of this year, which is the end of what’s known as the open enrollment period. The penalty is $95 per uninsured person in your household (half that amount for each uninsured dependent, up to three dependents), capped at 1 percent of your household income.

Not any insurance will do. It has to be insurance that meets the law’s requirements, generally what’s known as a bronze, silver, gold, or platinum plan. These plans differ in their cost and the deductible amounts and other matters but they’re all considered major medical plans that meet the law’s requirements.

The IRS is the federal agency charged with enforcing the health insurance requirement, so although the insurance requirement doesn’t pertain to your 2013 tax filing per se, you want to be aware of the March 31 deadline.

You can learn more about all of these tax issues in a pair of REALTOR® Magazine videos with Peter Baker, CPA, a Washington, D.C.-based accountant, and Evan Liddiard, NAR’s senior policy representative for tax policy.

Robert Freedman is manager of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.


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