Hi Howard! Thanks for the new "Ask Howard" category...I am sure you will get lots of good questions & hopefully not "GRIEF"! We are in process of doing our taxes as a fulltimer for the first time & were wondering if you knew of a publication that addresses some of the things you can use as a write-off. We owned our home the first 5 months of last year so we do have a few write-offs there, but the last 6 months is a killer! We are self employed in a few ventures & have filed as self-employed for many years. But figuring out write-offs in our new situation is a new ball game! Thanks Lee Ann
PS We enjoy your website & read it each & everyday. Really enjoying your photos!
Howard said
02:47 PM Mar 17, 2007
Lee Ann,
Thanks for the "loaded" question.
I'll preface my answer by saying I was neither a tax accountant or tax attorney and everyone's situation is different. But I'll try to give some general answers.
Let's hold off on your business ventures for now. Let's look at possible deductions for ANY full-timer.
Interest Deduction On RV Payments Of course I promote paying cash for your RV if possible. There are RV financing websites that pretend to tell people how financing is better than paying cash because of the interest deduction. That is garbage! Don't believe it! I can explain my position on that in more detail if anyone wants to hear it.
But if you do not have the cash option and have to finance an RV purchase, the interest you pay MAY be deductible if the RV is collateral for the loan AND the RV can be considered a primary or second home (usually an easy test for full-timers).
I say "MAY" because there are some income limitations on the deduction - not a problem for most of us. AND this would be an "itemized" deduction. If your total itemized deductions don't exceed the standard deduction of $10,300 (for 2006), the interest deduction does you no good.
Medical Expenses Once again, IF you can itemize, you can deduct medical expenses. The problem with that is you can only deduct those expenses that exceed 7.5% of your Adjusted Gross Income. So you have to have enough medical expenses, which none of us want, to cover 7.5% of AGI and you still have to be able to itemize.
Health Savings Account Contributions If you have a high deductible health insurance plan with a Health Savings Account (HSA) feature, you can deduct up to $5,450 (family) for contributions made to your HSA. You can make your 2006 contribution up to April 15 of 2007 as long as the plan and account were established prior to 2006. Also, those over age 55 can contribute additional "catch-up" payments that will be deductible. This is not an itemizable deduction, it's a 1040 front page deduction from income.
Individual Retirement Accounts Of course, you can still contribute to a traditional IRA. For persons 50 and over, you can deduct $5,000 per person in 2006 for contributions to a traditional IRA. You can make those contributions for 2006 up to April 15, 2007. There is an income limit phaseout for this deduction as well.
Expenses Of Volunteers Many full-timers try to deduct mileage, travel expenses, and campsite fees when volunteering. Let me just tell you that as full-timers it is VERY hard to meet the tests that would allow such deductions. Almost all full-timers are considered "transients" by the IRS. Unless you have a physical home base and travel directly from that site to a volunteer site and home again, I wouldn't attempt these deductions.
If, however, you spend money out of your pocket that is clearly for the benefit of the volunteering position and you are not reimbursed by the entity you are working for, you can deduct that.
Of course there are others like charitable contributions, etc.
Now for business related expenses.
Business Expenses First of all, business income and expenses need to be reported using Schedule C. That is where you basically do a financial statement for the IRS to show them a "Net Income" which is then what you put on your 1040 and is subject to tax. If you have no income, forget showing expenses unless 2006 was the first year of a particular business and you had up front costs to get the business going to produce income in 2007 and beyond.
The IRS applies two tests to determine whether a business is a business or a hobby. The first test is a "profits" test. You need to make a profit in three of five years to be considered a legit business. If you can't mee that test, you may be able to pass the "factors and circumstances" test. But that test is more subjective and I wouldn't want to rely on that one.
Assuming the business is legit and a Schedule C is being filed, you can offset any income with expenses that are "ordinary and necessary in the normal course of business". That's a pretty easy test.
If we shell out money for anything that is related to business that we wouldn't have spent otherwise, we make sure we keep the documentation and account for it (deduct it) on Schedule C. Think advertising, shipping/postage, office supplies, computer software for the business, etc.
The problem occurs when an expense is partially for business and partially for pleasure. You have to make your own judgment calls on those and how to split them, but as long as you have good back-up and a reasonable argument, you should be fine.
Some people go as far as figuring the "business use of home" deduction to compute other deductions related to the RV. In my experience, that is a waste of time and asking for trouble unless you have big RV payments and your RV IS your business.
So there is some general information. It is certainly not all-inclusive and I'm sure others will add their two cents. Though we are relatively conservative when it comes to reporting income (meaning we make sure we report everything), we are aggressive when it comes to business expenses up to the point of showing business losses.
Hope that helps a little. You can always look at the IRS instructions for Schedule C. But I'll warn you, there are lots of deductions available that are for sophisticated accounting systems and can be confusing. By the time you figure them out you, find you have wasted your time. My advice is to keep things simple, keep and label your receipts, and don't get into the 8 hour calculations that get you a $4 deduction. Can you tell I've been there?
Good luck!
leelare said
11:52 AM Mar 19, 2007
Hi Howard
Thank you so much for sharing your time & expertise.
We paid cash for our home, so we are really struggling for deductions this year as you can imagine!
After reading your post however, we did think of a few things to add to our Schedule C
On a different note, we listened to the audio interview of you & Linda, & are now able to put a voice with your pics! We really look forward to meeting the 2 of you & hope we cross paths this year sometime!
PS We enjoy your website & read it each & everyday. Really enjoying your photos!
Thanks for the "loaded" question.
I'll preface my answer by saying I was neither a tax accountant or tax attorney and everyone's situation is different. But I'll try to give some general answers.
Let's hold off on your business ventures for now. Let's look at possible deductions for ANY full-timer.
Interest Deduction On RV Payments
Of course I promote paying cash for your RV if possible. There are RV financing websites that pretend to tell people how financing is better than paying cash because of the interest deduction. That is garbage! Don't believe it! I can explain my position on that in more detail if anyone wants to hear it.
But if you do not have the cash option and have to finance an RV purchase, the interest you pay MAY be deductible if the RV is collateral for the loan AND the RV can be considered a primary or second home (usually an easy test for full-timers).
I say "MAY" because there are some income limitations on the deduction - not a problem for most of us.
Medical Expenses
Once again, IF you can itemize, you can deduct medical expenses. The problem with that is you can only deduct those expenses that exceed 7.5% of your Adjusted Gross Income. So you have to have enough medical expenses, which none of us want, to cover 7.5% of AGI and you still have to be able to itemize.
Health Savings Account Contributions
If you have a high deductible health insurance plan with a Health Savings Account (HSA) feature, you can deduct up to $5,450 (family) for contributions made to your HSA. You can make your 2006 contribution up to April 15 of 2007 as long as the plan and account were established prior to 2006. Also, those over age 55 can contribute additional "catch-up" payments that will be deductible. This is not an itemizable deduction, it's a 1040 front page deduction from income.
Individual Retirement Accounts
Of course, you can still contribute to a traditional IRA. For persons 50 and over, you can deduct $5,000 per person in 2006 for contributions to a traditional IRA. You can make those contributions for 2006 up to April 15, 2007. There is an income limit phaseout for this deduction as well.
Expenses Of Volunteers
Many full-timers try to deduct mileage, travel expenses, and campsite fees when volunteering. Let me just tell you that as full-timers it is VERY hard to meet the tests that would allow such deductions. Almost all full-timers are considered "transients" by the IRS. Unless you have a physical home base and travel directly from that site to a volunteer site and home again, I wouldn't attempt these deductions.
If, however, you spend money out of your pocket that is clearly for the benefit of the volunteering position and you are not reimbursed by the entity you are working for, you can deduct that.
Of course there are others like charitable contributions, etc.
Now for business related expenses.
Business Expenses
First of all, business income and expenses need to be reported using Schedule C. That is where you basically do a financial statement for the IRS to show them a "Net Income" which is then what you put on your 1040 and is subject to tax. If you have no income, forget showing expenses unless 2006 was the first year of a particular business and you had up front costs to get the business going to produce income in 2007 and beyond.
The IRS applies two tests to determine whether a business is a business or a hobby. The first test is a "profits" test. You need to make a profit in three of five years to be considered a legit business. If you can't mee that test, you may be able to pass the "factors and circumstances" test. But that test is more subjective and I wouldn't want to rely on that one.
Assuming the business is legit and a Schedule C is being filed, you can offset any income with expenses that are "ordinary and necessary in the normal course of business". That's a pretty easy test.
If we shell out money for anything that is related to business that we wouldn't have spent otherwise, we make sure we keep the documentation and account for it (deduct it) on Schedule C. Think advertising, shipping/postage, office supplies, computer software for the business, etc.
The problem occurs when an expense is partially for business and partially for pleasure. You have to make your own judgment calls on those and how to split them, but as long as you have good back-up and a reasonable argument, you should be fine.
Some people go as far as figuring the "business use of home" deduction to compute other deductions related to the RV. In my experience, that is a waste of time and asking for trouble unless you have big RV payments and your RV IS your business.
So there is some general information. It is certainly not all-inclusive and I'm sure others will add their two cents. Though we are relatively conservative when it comes to reporting income (meaning we make sure we report everything), we are aggressive when it comes to business expenses up to the point of showing business losses.
Hope that helps a little. You can always look at the IRS instructions for Schedule C. But I'll warn you, there are lots of deductions available that are for sophisticated accounting systems and can be confusing. By the time you figure them out you, find you have wasted your time. My advice is to keep things simple, keep and label your receipts, and don't get into the 8 hour calculations that get you a $4 deduction. Can you tell I've been there?
Good luck!
Thank you so much for sharing your time & expertise.
We paid cash for our home, so we are really struggling for deductions this year as you can imagine!
After reading your post however, we did think of a few things to add to our Schedule C
On a different note, we listened to the audio interview of you & Linda, & are now able to put a voice with your pics! We really look forward to meeting the 2 of you & hope we cross paths this year sometime!
Happy traveling!
Larry & Lee Ann