Grossbach Zaino & Associates, CPA's, PC


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Same End, Different Means

Tax deductions and tax credits: Both can reduce your income-tax liability. But each one does it differently.

 

Tax deductions reduce the amount of income on which you’re taxed. Your taxable income decreases by the amount of the deduction. The amount of the reduction in your final tax bill will depend on your tax bracket. Some deductions are available only if you itemize on your tax return instead of taking the standard deduction.

 

Tax credits reduce your tax liability dollar for dollar. They’re available whether you take the standard deduction or itemize. Some tax credits are fully or partially refundable, so if their value exceeds your tax liability, you’ll receive the excess amount. Generally, a tax credit is more valuable than a tax deduction.

 

Both types of tax breaks may be available to you


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Donate Your Wheels

Donating a car to a charity can help the organization and provide you with a tax deduction. But make sure you follow IRS rules. Here are a few highlights.

 

◆ The organization must be a qualified charity. You can verify the status using the “EO Select Check” tool on the IRS website (http://www.irs.gov).

 

◆ Your deduction generally will be limited to the gross amount the charity receives from the vehicle’s sale.

 

◆ In certain circumstances, you may be able to deduct the vehicle’s fair market value when you donated it. This may be the case if the charity:

 

  • Uses the vehicle in its regular activities

 

  • Materially improves the vehicle before selling it

 

  • Sells the car (or gives it away) to a needy individual for less than fair market value

 

You must itemize to claim the deduction, and various detailed requirements apply.


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Home Office Tax Tips

Working from home can potentially deliver some attractive tax advantages. If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

 

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowners insurance. You can deduct only the business portion of your indirect expenses.

 

What Space Can Qualify?

 

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following.

 

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

 

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

 

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

 

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

 

If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

 

Simplified Option

 

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.