What You Need to Know Before Filing Your Tax Return

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​Our San Diego tax attorney explains what you need to know before you file your tax return.

  1. Simplified home office deduction:

Beginning in 2014, taxpayers can use the simplified home office deduction to write off $5 per square foot of your home office space, up to $1,500 for 300 square feet.The old method for calculating the home office deduction required taking the percentage of your home used for business.You then were allowed to take that percentage against actual expenses relating to the home office.If you use the simplified option, you cannot take depreciation deduction for the portion of your home that you used for business.

The requirements on qualifying for a home office deduction have not changed.

The requirements to take a home office deduction:must use that portion of your home (usually a room) exclusively and on a regular basis for business purposes.

Using a room as a home office and a bedroom will likely be challenged.

  1. For self-employed individuals, estimated tax payment is due on April 15.

The first 2014 estimated tax payment is due April 15. You will need to estimate your tax payment. One way to avoid penalties is to take your 2013 tax liability and pay 100 percent of it (110 percent for high-income earners), split into four installments.

  1. Make sure to file your tax return on time, otherwise there are significant penalties.
  • Penalties for late filing of your return: the IRS will assess penalties of 5% of the taxes owed for each month. The maximum penalty is 25%.
  • Penalty for failing to pay your taxes: the IRS will assess a penalty for late payments of 0.5% each month, which also maxes out at 25%.
  • Corporate tax filing date was March 17. If your company is organized as an S corporation, every shareholder will be charged $195 a month, for a maximum of 12 months.

It is better to file your return and request an installment agreement from the IRS or the California Franchise Tax Board. Failure to file a return may result in the IRS or State of California filing a return for you with no deductions and it will likely have a higher reported income.

If you have been assessed penalties, contact our office as you may be entitled to an abatement of penalties, under certain circumstances.

  1. Mortgage interest deduction cap:

If you are deducting interest for your mortgage for your primary residence, there is a $1.1M cap. You can only deduct interest on your loan balance up to $1.1M. So if you have a $1.5M loan, interest on $400k will not be deductible on your Schedule A. However, interest expense you pay for your rental (investment) property does not have the same limitations.

  1. Deduction of state income taxes on Schedule A:

Taxpayers can deduct income taxes they paid to their state tax agency. Tax preparers normally report the amount of state income taxes owed by an individual. However, no one ever follows up to see if the personal actually paid their state income taxes.

If you don’t pay your state income taxes, the amount reported on your Schedule A can be disallowed by the IRS. Disallowed deductions on your Schedule A will generally increase your taxable income (assuming you do not have a loss for that year). Higher income usually means more taxes will be owed.

If you have questions about your return or are looking for payment options with the IRS or California Franchise Tax Board, contact our office to schedule a free consultation. We can help set up an installment agreement to avoid penalties and future collection action by the IRS.

Contact our San Diego tax firm today!