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This year's presidential election has drawn significant attention, but the elections you make on your 2015 personal tax return can be just as important to your financial welfare. Here's a list of 10 potential elections for individuals (including self-employed taxpayers) to consider making before tax day on April 18, 2016 (or April 19 for taxpayers in Maine and Massachusetts due to their Patriot's Day observances).
Many people itemize deductions on Schedule A of their tax returns, rather than taking the standard deduction. Your tax preparer will generally advise you to do so if your allowable itemized deductions exceed the standard deduction.
If you use part of your home as an office and take deductions for related expenses on your annual tax return, can you claim a valuable federal tax break when you sell? Specifically, can you claim the home sale gain exclusion of up to $250,000 for single taxpayers ($500,000 for married couples filing jointly)? In many cases, you can still take advantage of this tax benefit.
Gain Exclusion Qualification Rules
If you're single, you can potentially sell your principal residence for a gain of up to $250,000 without owing federal tax. If you're a married joint filer, you can potentially pocket up to $500,000 without paying federal tax. To qualify, you generally must pass these tests:
What Can You Deduct?
If you qualify to take home office deductions, you can deduct part of expenses including mortgage interest, depreciation, utilities, insurance, and repairs. The office must be used regularly and exclusively as your business place, which means personal activities cannot be done there. Other tips:
As long as your deductible home office space is in the same dwelling unit as your residence, you can use the gain exclusion to shelter profit from the entire property.
In other words, you are not required to split the sale into two separate deals for tax purposes (one transaction for the sale of the residential part of your property and another for the sale of the office part).
However, you will be taxed on gain up to the amount of depreciation deductions on the office part of your property that were claimed for business use after May 6, 1997. You will owe a maximum federal rate of 25 percent on this profit (called unrecaptured Section 1250 gain).
However, paying tax on this portion of your profit is not really so bad, considering that you collected earlier tax savings from the office part of your property.
A Separate Dwelling
The tax outcome is less favorable when the office is not in the same dwelling unit as the residence.
For example, say you claimed home office deductions for what was formerly a carriage house, garage, or finished basement with cooking and bathroom facilities and a separate entrance. In these cases, even though the office is on the same property or in the same building, it is considered to be a separate dwelling unit that is not part of the residential portion of your property.
In these scenarios, you must pass the ownership and use tests (see right-hand box) for both the office portion of your property and the residential part in order to treat the sale as a single transaction that is eligible for the gain exclusion.
If you fail the tests for the office part (for example, because it was used as a deductible office for the entire five-year period ending on the sale date), you must calculate separate gains for the office and residential portions of your property. Then, you can use the gain exclusion only to shelter profit from the residential part. Any gain on the office part is usually fully taxable.
You will generally owe a federal income tax rate of no more than 25 percent on gain up to the amount of post-May 6, 1997 depreciation. Any remaining profit from selling the office part of your property will be taxed at the regular capital gains rates.
Contact your tax adviser if you are contemplating the sale of property with a home office. Advance planning may be necessary to maximize your tax savings.
If you travel a lot on business, you may make some international trips, as well as trips within the United States. When traveling abroad, you may want to add a few extra days to a trip for relaxing and sightseeing.