OR - Repatriation amount included in sales factor The Oregon tax court has concluded that deemed dividends arising under Subpart F of IRC Sec. 951 through IRC Sec. 965 must be reincluded in the sales factor for a corporation excise (corporate) taxpay...
The IRS has released the annual inflation adjustments for 2025 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.
The IRS has released the annual inflation adjustments for 2025 for the income tax rate tables, plus more than 60 other tax provisions. The IRS makes these cost-of-living adjustments (COLAs) each year to reflect inflation.
2025 Income Tax Brackets
For 2025, the highest income tax bracket of 37 percent applies when taxable income hits:
$751,600 for married individuals filing jointly and surviving spouses,
$626,350 for single individuals and heads of households,
$375,800 for married individuals filing separately, and
$15,650 for estates and trusts.
2025 Standard Deduction
The standard deduction for 2025 is:
$30,000 for married individuals filing jointly and surviving spouses,
$22,500 for heads of households, and
$15,000 for single individuals and married individuals filing separately.
The standard deduction for a dependent is limited to the greater of:
$1,350 or
the sum of $450, plus the dependent’s earned income.
Individuals who are blind or at least 65 years old get an additional standard deduction of:
$1,600 for married taxpayers and surviving spouses, or
$2,000 for other taxpayers.
Alternative Minimum Tax (AMT) Exemption for 2025
The AMT exemption for 2025 is:
$137,000 for married individuals filing jointly and surviving spouses,
$88,100 for single individuals and heads of households,
$68,500 for married individuals filing separately, and
$30,700 for estates and trusts.
The exemption amounts phase out in 2025 when AMTI exceeds:
$1,252,700 for married individuals filing jointly and surviving spouses,
$626,350 for single individuals, heads of households, and married individuals filing separately, and
$102,500 for estates and trusts.
Expensing Code Sec. 179 Property in 2025
For tax years beginning in 2025, taxpayers can expense up to $1,250,000 in section 179 property. However, this dollar limit is reduced when the cost of section 179 property placed in service during the year exceeds $3,130,000.
Estate and Gift Tax Adjustments for 2025
The following inflation adjustments apply to federal estate and gift taxes in 2025:
the gift tax exclusion is $19,000 per donee, or $190,000 for gifts to spouses who are not U.S. citizens;
the federal estate tax exclusion is $13,990,000; and
the maximum reduction for real property under the special valuation method is $1,420,000.
2025 Inflation Adjustments for Other Tax Items
The maximum foreign earned income exclusion amount in 2025 is $130,000.
The IRS also provided inflation-adjusted amounts for the:
adoption credit,
earned income credit,
excludable interest on U.S. savings bonds used for education,
various penalties, and
many other provisions.
Effective Date of 2025 Adjustments
These inflation adjustments generally apply to tax years beginning in 2025, so they affect most returns that will be filed in 2026. However, some specified figures apply to transactions or events in calendar year 2025.
For 2025, the Social Security wage cap will be $176,100, and social security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. These changes reflect cost-of-living adjustments to account for inflation.
For 2025, the Social Security wage cap will be $176,100, and social security and Supplemental Security Income (SSI) benefits will increase by 2.5 percent. These changes reflect cost-of-living adjustments to account for inflation.
Wage Cap for Social Security Tax
The Federal Insurance Contributions Act (FICA) tax on wages is 7.65 percent each for the employee and the employer. FICA tax has two components:
a 6.2 percent social security tax, also known as old age, survivors, and disability insurance (OASDI); and
a 1.45 percent Medicare tax, also known as hospital insurance (HI).
For self-employed workers, the Self-Employment tax is 15.3 percent, consisting of:
a 12.4 percent OASDI tax; and
a 2.9 percent HI tax.
OASDI tax applies only up to a wage base, which includes most wages and self-employment income up to the annual wage cap.
For 2025, the wage base is $176,100. Thus, OASDI tax applies only to the taxpayer’s first $176,100 in wages or net earnings from self-employment. Taxpayers do not pay any OASDI tax on earnings that exceed $176,100.
There is no wage cap for HI tax.
Maximum Social Security Tax for 2025
For workers who earn $176,100 or more in 2025:
an employee will pay a total of $10,918.20 in social security tax ($176,100 x 6.2 percent);
the employer will pay the same amount; and
a self-employed worker will pay a total of $21,836.40 in social security tax ($176,100 x 12.4 percent).
Additional Medicare Tax
Higher-income workers may have to pay an Additional Medicare tax of 0.9 percent. This tax applies to wages and self-employment income that exceed:
$250,000 for married taxpayers who file a joint return;
$125,000 for married taxpayers who file separate returns; and
$200,000 for other taxpayers.
The annual wage cap does not affect the Additional Medicare tax.
Benefit Increase for 2025
Finally, a cost-of-living adjustment (COLA) will increase social security and SSI benefits for 2025 by 2.5 percent. The COLA is intended to ensure that inflation does not erode the purchasing power of these benefits.
The IRS announced tax relief for certain individuals and businesses affected by terrorist attacks in the State of Israel throughout 2023 and 2024. The Treasury and IRS may provide additional relief in the future.
The IRS announced tax relief for certain individuals and businesses affected by terrorist attacks in the State of Israel throughout 2023 and 2024. The Treasury and IRS may provide additional relief in the future.
For taxpayers who were affected taxpayers for purposes ofNotice 2023-71, I.R.B. 2023-44, 1191, the separate determination of terroristic action and grant of relief set forth in this notice will also postpone taxpayer acts and government acts already postponed by Notice 2023-71 if the taxpayer is eligible for relief under both notices.
Filing and Payment Deadlines Extended
Affected taxpayers will have until September 30, 2025, to file tax returns, make tax payments, and perform certain time-sensitive acts, that are due to be performed on or after September 30, 2024, and before September 30, 2025, including but not limited to:
Filing any return of income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax), harbor maintenance tax, or employment tax;
Paying any income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax), harbor maintenance tax, or employment tax, or any installment of those taxes;
Making contributions to a qualified retirement plan;
Filing a petition with the Tax Court;
Filing a claim for credit or refund of any tax; and
Bringing suit upon a claim for credit or refund of any tax.
The government is also provided until September 30, 2025, to perform certain time-sensitive acts, that are due to be performed on or after September 30, 2024, and before September 30, 2025, such as assessing any tax.
Taxpayers eligible for relief under Notice 2023-71 who are also eligible for relief under this notice have until September 30, 2025, to perform the time-sensitive acts that were postponed by Notice 2023-71. Taxpayers eligible for relief under Notice 2023-71 who are not also eligible for relief under this notice have until October 7, 2024, to perform the time-sensitive acts postponed by Notice 2023-71.
Government acts that were postponed by Notice 2023-71 until October 7, 2024, are also postponed by this notice until September 30, 2025, for taxpayers that are eligible for relief under Notice 2023-71 and this notice.
The IRS has expanded the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) under Code Sec. 223(c)(2)(C) without a deductible, or with a deductible below the applicable minimum deductible for the HDHP, to include oral contraception, breast cancer screening, and continuous glucose monitors for certain patients.
The IRS has expanded the list of preventive care benefits permitted to be provided by a high deductible health plan (HDHP) underCode Sec. 223(c)(2)(C)without a deductible, or with a deductible below the applicable minimum deductible for the HDHP, to include oral contraception, breast cancer screening, and continuous glucose monitors for certain patients.
Contraceptives
A health plan will not fail to qualify as an HDHP underCode Sec. 223(c)(2)merely because it provides benefits for over-the-counter (OTC) oral contraceptives, including emergency contraceptives, and male condoms before taxpayers satisfied the minimum annual deductible for an HDHP underCode Sec. 223(c)(2)(A). The HRSA-Supported Guidelines relating to contraceptives have been updated and no longer contain the"as prescribed"restriction.
Breast Cancer and Diabetes Care
The IRS has also clarified that all types of breast cancer screening for taxpayers (including those other than mammograms) who have not been diagnosed with breast cancer will be treated as preventive care underCode Sec. 223(c)(2)(C). Moreover, continuous glucose monitors for individuals diagnosed with diabetes are also treated as preventive care underCode Sec. 223(c)(2)(C).
Insulin Products Safe Harbor
The new safe harbor for absence of a deductible for certain insulin products underCode Sec. 223(c)(2)(G)will apply without regard to whether the insulin product was prescribed to treat taxpayers diagnosed with diabetes. or prescribed for the purpose of preventing the exacerbation of diabetes or the development of a secondary condition.
Effective Date
This guidance is generally effective for plan years (in the individual market, policy years) that begin on or after December 30, 2022.
Effect on Other Documents
Notice 2004-23is clarified by noting the safe harbor for absence of a deductible for breast cancer screening.
Notice 2018-12is superseded with respect to the guidance regarding male condoms.
Notice 2019-45is clarified and expanded by noting the safe harbor for absence of a deductible for continuous glucose monitors and for certain insulin products pursuant to the Inflation Reduction Act of 2022.
The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rate for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2024 for purposes of the taxation of fringe benefits.
The IRS has released the applicable terminal charge and the Standard Industry Fare Level (SIFL) mileage rate for determining the value of noncommercial flights on employer-provided aircraft in effect for the second half of 2024 for purposes of the taxation of fringe benefits. Further, in March 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136) was enacted, directing the Treasury Department to allot up to $25 billion for domestic carriers to cover payroll expenses via grants and promissory notes, known as the Payroll Support Program (PSP). Therefore, the IRS has provided the SIFL Mileage Rate. The value of a flight is determined under the base aircraft valuation formula by multiplying the SIFL cents-per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple provided inReg. §1.61-21(g)(7)and then adding the applicable terminal charge.
For flights taken during the period from July 1, 2024, through December 31, 2024, the terminal charge is $54.30, and the SIFL rates are: $.2971 per mile for the first 500 miles, $.2265 per mile 501 through 1,500 miles, and $.2178 per mile over 1,500 miles.
The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.
The IRS identified drought-stricken areas where tax relief is available to taxpayers that sold or exchanged livestock because of drought. The relief extends the deadlines for taxpayers to replace the livestock and avoid reporting gain on the sales. These extensions apply until the drought-stricken area has a drought-free year.
When Sales of Livestock are Involuntary Conversions
Sales of livestock due to drought are involuntary conversions of property. Taxpayers can postpone gain on involuntary conversions if they buy qualified replacement property during the replacement period. Qualified replacement property must be similar or related in service or use to the converted property.
Usually, the replacement period ends two years after the tax year in which the involuntary conversion occurs. However, a longer replacement period applies in several situations, such as when sales occur in a drought-stricken area.
Livestock Sold Because of Weather
Taxpayers have four years to replace livestock they sold or exchanged solely because of drought, flood, or other weather condition. Three conditions apply.
First, the livestock cannot be raised for slaughter, held for sporting purposes or be poultry.
Second, the taxpayer must have held the converted livestock for:
draft.
dairy, or
breeding purposes.
Third, the weather condition must make the area eligible for federal assistance.
Persistent Drought
The IRS extends the four-year replacement period when a taxpayer sells or exchanges livestock due to persistent drought. The extension continues until the taxpayer’s region experiences a drought-free year.
The first drought-free year is the first 12-month period that:
ends on August 31 in or after the last year of the four-year replacement period, and
does not include any weekly period of drought.
What Areas are Suffering from Drought
The National Drought Mitigation Center produces weekly Drought Monitor maps that report drought-stricken areas. Taxpayers can view these maps at
However, the IRS also provided a list of areas where the year ending on August 31, 2024, was not a drought-free year. The replacement period in these areas will continue until the area has a drought-free year.
The IRS has taken special steps to provide more than 500 employees to help with the Federal Emergency Management Agency’s (FEMA) disaster relief call lines and sending IRS Criminal Investigation (IRS-CI) agents into devastated areas to help with search and rescue efforts and other relief work as part of efforts to help victims of Hurricane Helene. The IRS assigned more than 500 customer service representatives from Dallas and Philadelphia to help FEMA phone operations.
The IRS has taken special steps to provide more than 500 employees to help with the Federal Emergency Management Agency’s (FEMA) disaster relief call lines and sending IRS Criminal Investigation (IRS-CI) agents into devastated areas to help with search and rescue efforts and other relief work as part of efforts to help victims of Hurricane Helene. The IRS assigned more than 500 customer service representatives from Dallas and Philadelphia to help FEMA phone operations.
Further, a team of 16 special agents from across the country were initially deployed last week by the IRS-CI to the Tampa area to help with search and rescue teams. During the weekend, the IRS team moved to North Carolina to assist with door-to-door search efforts. As part of this work, the IRS-CI agents are also assisting FEMA with security and protection for relief teams and their equipment.
Additionally, the IRS reminded taxpayers in Alabama, Georgia, North Carolina and South Carolina and parts of Florida, Tennessee and Virginia that they have until May 1, 2025, to file various federal individual and business tax returns and make tax payments. The IRS is offering relief to any area designated by FEMA. Besides all of Alabama, Georgia, North Carolina and South Carolina, this currently includes 41 counties in Florida, eight counties in Tennessee and six counties and one city in Virginia.
The IRS provided guidance addressing long-term, part-time employee eligibility rules under Code Sec. 403(b)(12)(D), which apply to certain 403(b) plans beginning in 2025. The IRS also announced a delayed applicability date for related final regulations under Code Sec. 401(k).
The IRS provided guidance addressing long-term, part-time employee eligibility rules underCode Sec. 403(b)(12)(D), which apply to certain 403(b) plans beginning in 2025. The IRS also announced a delayed applicability date for related final regulations underCode Sec. 401(k).
Application of Code Sec. 403(b)(12)
The IRS provided guidance in the form of questions and answers on the requirement that 403(b) plans allow certain long-term, part-time employee to participate. The IRS clarified that the long-term, part-time employee eligibility rules only apply to 403(b) plans that are subject to title I of ERISA. Thus, a governmental plan under ERISA §3(32) is not subject to the long-term, part-time employee eligibility rules because it is not subject to title I pursuant to ERISA §4(b). The guidance also provides that 403(b) plans can continue to exclude student employees regardless of whether the individual qualifies under long-term, part-time employee eligibility rules.
Future Guidance
The guidance for 403(b) plans applies for plan years beginning after December 31, 2024. The IRS anticipates issuing proposed regulations applicable to 403(b) plans that are generally similar to regulations applicable to 401(k) plans.
Applicability Date for 401(k) Regulations
The IRS also addressed the applicability date of rules for 401(k) plans. Final regulations related to long-term, part-time employee eligibility rules will apply no earlier than to plan years beginning on or after January 1, 2026, the IRS said.
The Internal Revenue Service is estimated a slight decrease in the estimated tax gap for tax year 2022.
According to Tax Gap Projections for Tax Year 2022report, the IRS is projecting the net tax gap to be $606 billion in TY 2022, down from the revised projected tax gap of $617 billion for TY 2021. The decrease track with a one-percent decrease in the true tax liability during that time.
he Internal Revenue Service is estimated a slight decrease in the estimated tax gap for tax year 2022.
According to Tax Gap Projections for Tax Year 2022report, the IRS is projecting the net tax gap to be $606 billion in TY 2022, down from the revised projected tax gap of $617 billion for TY 2021. The decrease track with a one-percent decrease in the true tax liability during that time.
The TY 2022 gross tax is projected to be $696 billion, and includes the following components:
Underreporting (tax understated on timely filed returns) - $539 billion
Underpayment (tax that was reported on time, but not paid on time) - $94 billion
Nonfiling (tax not paid on time by those who did not file on time) - $63 billion
For TY 2022, the projected net tax gap broken down by tax type includes:
Individual income tax - $447 billion
Corporation income tax - $40 billion
Employment taxes - $119 billion
Estate tax and excise tax – less than $500 million in each category
The size of the tax gap"vividly illustrates the ongoing need for adequate funding for the IRS,"agency Commissioner Daniel Werfel said in a statement."We need to focus both on compliance efforts to enforce existing laws as well as improving services to help taxpayers with their tax obligations to help address the tax gap."
From TY 2021 to TY 2022, the voluntary compliance rate slightly increased from 84.9 percent to 85.0 percent and the net compliance rate rose slightly from 86.9 percent from 86.8 percent.
The agency stated in the report that the relatively static voluntary compliance rate was"largely expected since the projection methodology assumes that reporting compliance behavior has not changed since the TY 2014-2016 time frame,"although the voluntary compliance rate is projected to fall from 58 percent in TY 2021 to 55 percent in TY 2022.
The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.
The IRS has provided guidance regarding whether taxpayers receiving loans under the Paycheck Protection Program (PPP) may deduct otherwise deductible expenses. Act Sec. 1106(i) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act ( P.L. 116-136) did not address whether generally allowable deductions such as those under Code Secs. 162 and 163 would still be permitted if the loan was later forgiven pursuant to Act Sec. 1106(b). The IRS has found that such deductions are not permissible.
PPP Loans The CARES Act expanded the Small Business Administration’s (SBA’s) existing Section 7(a) loan program to include certain PPP loans. The PPP is made available from the SBA to provide small businesses with loans to help pay payroll costs, mortgages, rent, and utilities during the COVID-19 (coronavirus) crisis. All payments of principal, interest, and fees under the loans are deferred for at least 6 months. The loans are also forgiven for amounts payroll costs, mortgage or rent obligations, and certain utility payments incurred between February 15 and June 30. The loans are 100 percent guaranteed by the SBA.
Deductions Prohibited If the SBA forgives a taxpayer’s PPP loan pursuant to Act. Sec. 1106(b) of the CARES Act, the amount of the loan is excluded from gross income. Under Reg. §1.265-1 taxpayers cannot deduct expenses that are allocable to income that is either wholly excluded from gross income or wholly exempt from the taxes. This rule exists in order to prevent double tax benefits. Thus, the IRS has determined that taxpayers who have their PPP loans forgiven may not deduct any business or interest expenses related to the income associated with the loan.
Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.
Treasury and the Small Business Administration (SBA) have worked together to release the Paycheck Protection Program (PPP) Loan Forgiveness Application. According to Treasury’s May 15 press release, the application and correlating instructions inform borrowers how to apply for forgiveness of PPP loans under the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act ( P.L. 116-136). The PPP was enacted under the CARES Act to provide eligible small businesses with loans during the COVID-19 pandemic.
Additionally, SBA is expected to issue regulations and guidance to assist borrowers as they complete their applications, and to provide lenders with guidance on their responsibilities, according to Treasury.
Measures included in the application and instructions intended to reduce compliance burdens and simplify the process for borrowers include:
options to calculate payroll costs using an "alternative payroll covered period" that aligns with borrowers’ regular payroll cycles;
flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan;
step-by-step instructions on how to perform the calculations required by the CARES Act to confirm eligibility for loan forgiveness;
borrower-friendly implementation of statutory exemptions from loan forgiveness reduction based on rehiring by June 30; and
the addition of a new exemption from the loan forgiveness reduction for borrowers who have made a good-faith, written offer to rehire workers that was declined.
Although you may want your traditional individual retirement accounts (IRAs) to keep accumulating tax-free well into your old age, the IRS sets certain deadlines. The price for getting an upfront deduction when contributing to a traditional IRA (or having a rollover IRA) is that Uncle Sam eventually starts taxing it once you reach 70½. The required minimum distribution (RMD) rules under the Internal Revenue Code accomplish that.
Although you may want your traditional individual retirement accounts (IRAs) to keep accumulating tax-free well into your old age, the IRS sets certain deadlines. The price for getting an upfront deduction when contributing to a traditional IRA (or having a rollover IRA) is that Uncle Sam eventually starts taxing it once you reach 70½. The required minimum distribution (RMD) rules under the Internal Revenue Code accomplish that.
If distributions do not meet the strict minimum requirements for any one year once you reach 70½, you must pay an excise tax equal to 50 percent, even if you kept the money in the account by mistake.
Required minimum distribution
The traditional IRA owner must begin receiving a minimum amount of distributions (the RMD) from his or her IRA by April 1 of the year following the year in which he or she reaches age 70½. That first deadline is referred to as the required beginning date.
If, in any year, you as a traditional IRA owner receive more than the RMD for that year, you will not receive credit for the additional amount when determining the RMD for future years. However, any amount distributed in your 70½ year will be credited toward the amount that must be distributed by April 1 of the following year. The RMD for any year after the year you turn 70½ must be made by December 31 of that year.
Distribution period
The distribution periodis the maximum number of years over which you are allowed to take distributions from the IRA. You calculate your RMD for each year by dividing the amount in the IRA as of the close of business on December 31 of the preceding year by your life expectancy at that time as set by special IRS tables. Those tables are found in IRS Publication 590, "IRAs Appendix C."
Example: Say you were born on November 1, 1936, are unmarried, and have a traditional IRA. Since you have reached age 70½ in 2007 (on May 1 to be exact), your required beginning date is April 1, 2008. Assume further that as of December 31, 2006, your account balance was $26,500. Using Table III, the applicable distribution period for someone your age as of December 31, 2007 (when you will be age 71) is 26.5 years. Your RMD for 2007 is $1,000 ($26,500 ÷ 26.5). That amount must be distributed to you by April 1, 2008.
The RMD rules do not apply to Roth IRAs; they only apply to traditional IRAs. That is one of the principal estate planning reasons for setting up a Roth IRA or rolling over a traditional IRA into a Roth IRA. The downside of a Roth IRA, of course, is not getting an upfront deduction for contributions, or having to pay tax on the balance when rolled over from a traditional IRA into a Roth IRA.
Please contact this office if you need any help in determining a RMD or in deciding whether a rollover to a Roth IRA now to avoid RMD issues later might make sense for you.
Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?
Q. I use my computer for both business and pleasure and I am confused about how much I can deduct. Also, how are PDAs such as Palm Pilots, etc. deducted for tax purposes?
A. Because computers and peripheral equipment are viewed as more susceptible than other business property to unwarranted deductions for personal use, they are subject to special scrutiny under the tax law. This scrutiny comes from their classification as "listed property," which limits the amount that may be deducted each year.
A computer as listed property only becomes an issue if it is not used exclusively in business. If a computer is used exclusively at the taxpayer's regular business establishment or in the taxpayer's principal trade or business, the listed property limitations don't apply at all.
Any computer that you use predominately for pleasure may not be written-off over its life nearly as quickly as exclusive-use computers. If your business usage does not meet the predominant use test, you are relegated to using a much slower depreciation method (the ADS, straight-line method) over the longer-ADS recovery period.
Your computer will meet the predominant use test for any tax year if its qualified business use is more than 50% of its total use. You must review your computer's usage and determine the percentage usage for each of its various uses (business, investment, and personal). When computing the predominant use test, any investment use of your computer cannot be considered as part of the percentage of qualified business use. However, you do use the combined total of business and investment use to figure your depreciation deduction for the property. It's up to you to prove business use to the IRS; the IRS does not need to prove personal use to reject your deductions.
In order to claim your computer expenses, you must meet the adequate records requirements by maintaining a "log" or other documentary evidence that sufficiently establishes the business/investment percentage claimed. The log should be similar to a log you would keep to track your auto expenses, indicating date, time of usage, business or nonbusiness, and business reason. Good documentation is always the key to success if your return is ever audited.
Finally, what about application of these rules to PDA's? The shorter the designated "life" of the property, the faster you can write-off its cost. Cell phones are generally considered 7-year property (the cost is depreciated over seven years). Computers are generally considered 5-year property, and computer-software normally is 3-year property. PDA's are generally classified as 5-year property, being considered wireless computers. If a PDA includes a cell phone feature, as long as that feature is not predominant and removable, it continues to fall under the 5-year property rule. Software that you may download to your PDA is 3-year property. Software that you buy already loaded into the PDA, however, is 5-year property. Monthly charges for a wireless service provider are deductible as paid each month, just as your business would deduct any phone or internet service bill.
Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.
Most homeowners have found that over the past five to ten years, real estate -especially the home in which they live-- has proven to be a great investment. When the 1997 Tax Law passed, most homeowners assumed that the eventual sale of their home would be tax free. At that time, Congress exempted from tax at least $250,000 of gain on the sale of a principal residence; $500,000 if a joint return was filed. Now, those exemption amounts, which are not adjusted for inflation, don't seem too generous for many homeowners.
What can be done?
Keeping lots of receipts is one answer! Remember, it will be the gain on your home that is potentially taxable, not full sale price. Gain is equal to net sales price minus an amount equal to the price you paid for your house (including mortgage debt) plus the cost of any improvements made over the years. Bottom line: If your residence has gain that will otherwise be taxed, you will get around 30 percent back on the cost of the improvements (assume your tax bracket is about 30 percent when you sell), simply by keeping good records of those improvements.
The basis of your personal residence is generally made up of three basic components: original cost, improvements, and certain other basis adjustments
Original cost
How your home was acquired will need to be considered when determining its original cost basis.
Purchase or Construction. If you bought your home, your original cost basis will generally include the purchase price of the property and most settlement or closing costs you paid. If you or someone else constructed your home, your basis in the home would be your basis in the land plus the amount you paid to have the home built, including any settlement and closing costs incurred to acquire the land or secure a loan.
Gift. If you acquired your home as a gift, your basis will be the same as it would be in the hands of the donor at the time it was given to you.
Inheritance. If you inherited your home, your basis is the fair market value on the date of the deceased's death or on the "alternate valuation" date, as indicated on the federal estate tax return filed for the deceased.
Divorce. If your home was transferred to you from your ex-spouse incident to your divorce, your basis is the same as the ex-spouse's adjusted basis just before the transfer took place.
Improvements
If you've been in your home any length of time, you most likely have made some home improvements. These improvements will generally increase your home's basis and therefore decrease any potential gain on the sale of your residence. Before you increase your basis for any home improvements, though, you will need to determine which expenditures can actually be considered improvements versus repairs.
An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. The cost of any improvements cannot be deducted and must be added to the basis of your home. Examples of improvements include putting room additions, putting up a fence, putting in new plumbing or wiring, installing a new roof, and resurfacing your patio. It doesn't need to be a big project, however, just relatively permanent. For example, putting in a skylight or a new kitchen sink qualifies.
Repairs, on the other hand, are expenses that are incurred to keep the property in a generally efficient operating condition and do not add value or extend the life of the property. For a personal residence, these costs do not add to the basis of the home. Examples of repairs are painting, mending drywall, and fixing a minor plumbing problem.
Other basis adjustments
Additional items that will increase your basis include expenditures for restoring damaged property and assessing local improvements. Some common decreases to your home's basis are:
Insurance reimbursements for casualty losses.
Deductible casualty losses that aren't covered by insurance.
Payments received for easement or right-of-way granted.
Deferred gain(s) on previous home sales before 1998.
Depreciation claimed after May 6, 1997 if you used your home for business or rental purposes.
Recordkeeping
In order to document your home's basis, it is wise to keep the records that substantiate the basis of your residence such as settlement statements, receipts, canceled checks, and other records for all improvements you made. Good records can make your life a lot easier if the IRS ever questions your gain calculation. You should keep these records for as long as you own the home. Once you sell the home, keep the records until the statute of limitations expires (generally three years after the date on which the return was filed reporting the sale).