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Andrew D. Schwartz, CPA
and Realistic Returns?
Managing your personal finances is a year round process.
Even so, New Year’s is a time to see how close you came to meeting your 2005 financial resolutions, and to get a jump on
your 2006 financial
Here are some helpful financial steps to take for 2006.
REset your retirement savings: Most people find it easier to max out
their retirement contributions by budgeting a set amount each month.
Instruct your employer to withhold $1,250 per month for your 401(k) or 403(b)
plan to ensure that you hit the max of $15,000 in 2006.
Self-employed? You can sock away up to $44,000 next year into a SEP,
Keogh or Solo 401(k), which equals $3,667 per month. And if you'll
be 50 or older by December 31st, the limit jumps to $20,000 for 401(k) and
403(b) salary deferrals, and $49,000 for Solo 401(k)'s.
REbalance your investment portfolio: 2005 was no different than
any other year; some financial sectors performed better than others.
Chances are that the sectors that did the best this year won’t repeat in
2006. By rebalancing your portfolio to it's original or updated
asset allocation, you lock in gains from the sectors with the best
returns, and purchase shares in the sectors that have a good chance of
outperforming last year's winners.
REvise your savings and debt reduction goals: Take a few minutes to
set new savings goals including how much you’d like to put away towards your
retirement, a child’s education, and the down payment on a home, and also to
reset how much you plan to pay down your student loans, personal debt, and
Download our (Microsoft
Excel) debt/savings calculator
to help you crunch the numbers.
REvisit your life and disability insurance needs: As you move through
your career, your life and disability insurance needs change. Give some
thought to how much of these insurances you need versus how much you
currently get through your employer’s benefit package.
REsolve errors on your credit report: Now that you’re entitled to
three free credit reports each year, there’s no excuse to not look at this
important financial report annually, especially since errors are not uncommon. Order your free report at
Questions about financial planning steps you
should take for 2006? Please check out our
Directory of Financial
Advisors to find a professional familiar with the financial planning
issues that affect you and your colleagues.
HOME OFFICE REVISITED
Andrew D. Schwartz, CPA
Whether or not claiming the home office
deduction is a red flag with the IRS is an ongoing debate. Even so,
most of the recent tax law changes involving the home office rules have gone in
the taxpayer's favor.
Prior to 1999, not many people qualified
for the home office deduction. That's because you were required to
perform the income producing activity within the home office to be eligible.
Doctors had to see patients, lawyers had to meet with clients, and realtors
could only make their sales over the phone.
changed effective in 1999. As long as you use a portion of your home regularly and
exclusively in connection with your trade or business you now qualify to claim the home office deduction.
renters, this was great news. Since rent isn’t otherwise deductible on your
federal tax return, being able to claim the home office deduction made a
portion of your rent tax deductible.
homeowners, however, there was a potential pitfall when you sold your home.
Assuming you sold your home for a
gain, you would generally be taxed on the portion of your home that you
claimed as your home office. This pitfall caused many homeowners to forego
tax law change eliminated this pitfall. Under the current rules, if the office is
located within your home (and not a
separate structure on your property), you will no longer be taxed on
the portion of the gain attributable to your home office when you
sell your home. All you need to do is pay taxes on the depreciation you
claimed over the years.
Additional Tax Breaks
Looking for more reasons to claim the home office deduction on your tax
Claiming a home office limits the impact of the
dreaded Alternative Minimum Tax (AMT). While your real estate
taxes are allowable as an itemized deduction when calculating your "regular"
tax liability, they don't count when calculating the AMT. The portion
of your real estate taxes allocated to your home office, however, are not
limited by the AMT if you're self-employed.
And if you have more than $1.1 million of total mortgage debt outstanding on your
principal residence and vacation home, your mortgage interest deduction
is capped. By claiming the home office deduction, you'll
deduct a portion of the excess interest as part of this deduction.
To claim the home office deduction, a portion of your home must be used
regularly and exclusively in connection with your trade or business.
According to the IRS, "to qualify under the exclusive use test, you must use
a specific area of your home only for your trade or business [including for
managerial and administrative tasks]. And to qualify under the regular
use test, you must use a specific area of your home for business on a
If your home office is used for any non-business purpose during the year, or
only sporadically in connection with your business, no deduction is
How To Claim This Deduction
To claim the home office deduction, you need to complete and attach a
Form 8829, Expenses for Business Use of Your Home, to your federal
income tax return. On that tax form, you'll prorate your allowable
household costs by the percentage of your home that is used in
connection with your business. You make this calculation
by dividing the square footage of your office by the total square footage of
Allowable costs include mortgage interest, real estate taxes, utilities,
repairs and maintenance, and insurance. You'll also include the rent
you pay, or depreciation based on the amount you paid for the home (reduced
by the value of the land) plus
You'll then deduct those costs
directly against net self- employment income on the Schedule C or as
a miscellaneous itemized deduction on the Schedule A if you're
compensated as an employee.
Are you self-employed? If so, the home office deduction also reduces the self-employment taxes you pay.
More information about the home office deduction can be found at the
IRS' website, where you can
download Form 8829 along with
instructions, as well as
587, Business Use of Your Home.
TAX AND FINANCIAL PLANNING CALENDAR FOR
Saving and Investing
4th quarter 2005 estimates due 1/15/06
Receive W-2s and 1099s by January 31, 2006
Review your withholding for 2006, and, if necessary, file
a new W-4 Form with your employer to adjust your
Establish a savings and debt reduction goals for the year
Try to increase your monthly contributions to your 401(k)
or 403(b) plans. The maximum annual contribution for
2006 is $15,000, or $1,250 per month
Automatically transfer $333.33 per month from your checking account into a Roth or Traditional
IRA, and $166.67 per month into an Education Savings Account for each
of your children
- For 2005, the standard deduction for a single individual is
$5,000 and for a married couple is $10,000. A person will benefit by
itemizing once allowable deductions exceed the applicable standard deduction.
Itemized deductions include state and local income taxes (or sales taxes), real estate taxes,
mortgage interest, charitable contributions, and unreimbursed employee business
expenses. Check our list of deductible expenses common to healthcare
professionals for more info.
- For 2005,
the personal exemption is $3,200. Individuals will claim a
personal deduction for themselves, their spouse, and their dependents.
- The maximum earnings subject to social security taxes is $94,200
for 2006, up from $90,000 in 2005.
- The standard mileage rate is $.485 per business mile as of
September 1, 2005 (after being $.405 per mile through August 31, 2005), and
will then be $.445 per mile for 2006.
- The maximum annual contribution into a 401(k) plan or a
403(b) plan is $15,000 for 2006.
And if you'll be 50 or older by December 31, 2006, you can contribute an extra
$5,000 into your 401(k) or 403(b) account this year.
- The maximum annual contribution to your IRA is $4,000 for 2005
and 2006. And once you turn 50, you can contribute an extra $500 into your
IRA for 2005 and an extra $1,000 for 2006. You have until April 15, 2006 to make your
2005 IRA contributions.
copyright - 2006 - The MDTAXES Network
Tax and financial planning calendar for January, 2006
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You're Invited to Attend Our Complimentary Presentation
Tax and Basic Financial Planning
Issues Applicable to Young Health Care Professionals
Various members of The
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and basic financial planning issues that affect you and your
The presentation will focus on the tax issues surrounding
moonlighting and deducting professional expenses.
Here is a list of cities
where the presentation will be held:
Boston - 1/31/06
For more information, click on the
name of the city.