Tax deductions are worth a lot. Exactly how much depends, of course, on your top tax bracket.
If, for example, you’re in the 28 percent federal income tax bracket, every $100 in deductions will save you $28 in federal income taxes.
If you’re self-employed, and the deduction is a business deduction, it will also save you on self-employment taxes as well — a combined Social Security and Medicare tax of 15.3 percent tax up to an annual ceiling (for 2013, $113,700 in net self-employment income) and a 2.9 percent Medicare tax thereafter (with an extra .9 percent tax for very high earners).
If your state has income taxes, your deductions will save on these, too.
So you want to make sure you claim every tax deduction you can on your 2013 taxes. Here are three potentially valuable tax deductions that real estate pros can easily overlook:
Home office deduction
Almost any real estate professional who uses a portion of his or her home exclusively for business can qualify for this deduction. This is so even if you do the bulk of your work outside your home.
This deduction is particularly valuable if you are a renter because it enables you to deduct a portion of your monthly rent, a sizable expense that is ordinarily not deductible. If you own your home, it is not worth as much, but still permits you to deduct a portion of your utilities and other home expenses and depreciation for the area of your home office.
Even though they qualify for the home office deduction, many people don’t take it because it can be complicated and/or they fear it will increase their chances of getting audited. There is no empirical evidence that taking this deduction increases your chances of being audited. For years, the IRS has denied that the deduction is an audit flag.
In fact, the IRS has created an optional simplified version of the deduction in attempt to encourage people to take it. Using the simplified method, you merely deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. The simplified home office deduction can be used only for 2013 and future tax years. So this is the first tax filing season it is available. We discussed the simplified method in detail in a prior article (see “Simplified home office deduction may not be the best option”).
State sales taxes
If you itemize your deductions, you have a choice between deducting the state and local income tax or state sales tax you paid in 2013. If you live in Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, Washington or Wyoming, you don’t pay any state income taxes and can only take the sales tax deduction. If you live in one of the other 42 states that has income taxes, you’ll usually be better off deducting such taxes, rather than sales tax. However, this may not be the case if you bought an expensive item during 2013, such as a car or boat, that required you to pay substantial sales tax.
Since figuring out how much you actually paid in sales tax during 2013 (or any other year) is likely impossible, the IRS has estimated how much sales tax people at various income levels pay on average in each state based on that state’s sales tax rates. Its results are contained in the sales tax tables in the instructions to IRS Schedule A. But you are allowed to add to the total in the table the actual sales tax you pay for:
- a motor vehicle (including a car, motorcycle, motor home, recreational vehicle, sport utility vehicle, truck, van, and off-road vehicle).
- a leased motor vehicle.
- an aircraft or boat.
- a home (including a mobile home or prefabricated home) or substantial addition to or major renovation of a home).
To make things as easy as possible for you, the IRS has created an online sales tax deduction calculator you can use instead of its printed tables and worksheet.
If you moved during 2013, the cost is deductible if your new workplace is at least 50 miles farther from your old home than your old job location was from your old home. In addition, you must work full time at your new job for at least 39 weeks during the first 12 months after the move, and for a total of at least 78 weeks during the first 24 months following the move. If you meet these requirements, you can deduct the reasonable expenses of:
- moving your household goods and personal effects (including in-transit or foreign-move storage expenses).
- traveling (including lodging but not meals) to your new home.
Moving expenses are figured on IRS Form 3903, Moving Expenses, and deducted as an adjustment to income on your Form 1040. This makes them a particularly attractive deduction because they are not a miscellaneous itemized deduction that must be listed on Schedule A and are not subject to the 2 percent of adjusted gross income limitation on such deductions (miscellaneous itemized deductions are deductible only if, and to the extent, they exceed 2 percent of AGI).
Editor’s note: This column has been updated to correct that for taxpayers in the 28 percent federal income tax bracket, every $100 in deductions will save $28 in federal income taxes, not $280.
Stephen Fishman is a tax expert, attorney and author who has published 20 books, including “The Real Estate Agent’s Tax Deduction Guide,” “Working for Yourself,” “Deduct It!” and “Working with Independent Contractors.” His website can be found at fishmanlawandtaxfiles.com.