Who can claim HOME OFFICE DEDUCTION and what amount?

Strating from pandemic months, many taxpayers shifted their workplace and started working from home. Others quit their employment to launch their own companies or begin freelancing on the side, at which point they moved their operations into a home office that they had previously established.  

Some people who work from home are qualified to obtain a tax deduction for the expenses associated with their home office, but the majority of people who work from home are not eligible for this break.  

Home office expenses dependent on whether taxpayers work for a company or are self-employed, as well as whether taxpayer has a specific area of his/her home set aside as an office where he / she doesn't engage in any other activities. 

Unfortunately, taxpayers cannot take advantage of the tax break for a home office if the taxpayer is an employee working remotely rather than the owner of his/her own business (however some states do allow this tax deduction for employees). Employees were able to deduct unreimbursed employee business expenditures, including the home office deduction, prior to the Tax Cuts and Jobs Act (TCJA) being approved in 2017. Nevertheless, beginning with the tax year 2018 and continuing through the tax year 2025, these deductions for employee business costs will not be allowed. 

Mainly there are two tests one should fulfill to claim the home office deduction. These are (1) exclusive and regular use (2) principal places of business.  

Exclusive and regular use 

A taxpayer is required to use a section of his / her home, apartment, condominium, mobile home, boat, or another structure that is analogous to this one for the purposes of his / her business on a consistent and exclusive basis.  

The requirement that taxpayers must utilize a section of taxpayer house exclusively and consistently for business is the primary obstacle that must be overcome in order to qualify for these deductions. 

The exclusive-use condition is taken very seriously by the IRS, which is consistent with the interpretation of the statute.  

Example, consider that taxpayers have dedicated a space in his / her house to the operation of a full-time business, and that taxpayer spends ten hours per day, every day of the week, working there. If taxpayer break the exclusive-use provision by allowing his / her children to use the office to complete their homework, taxpayer will lose the opportunity to take deductions for a home office on his / her taxes. 

Exception to exclusive use 

• The day care center and the storage facility are two examples of exceptions to this guideline. 

Principal places of business. 

The taxpayer home should serve as the primary site of taxpayer's business or taxpayer's home office should serve as a place where taxpayer often meet with customers or clients.  

In addition to achieving the requirements for exclusive use and regular usage, taxpayer home office must also meet one of the following criteria: 

• it must be either the primary site of that firm or 

• a place where regular meetings with customers or clients takes place. 

 A taxpayer is exempt from either the principal-place-of-business test or the deal-with-clients test if the taxpayer's home office is located in a facility that is isolated from the rest of his / her house and stands on its own. For example, a detached garage that has been converted into an office. Taxpayer can be eligible for write-offs for his / her home-based business provided taxpayer can demonstrate that he / she meet both the exclusive-use and the regular-use requirements. 

Home office business deductions can be determined using either (1) actual method or (2) simplified method. 

According to the actual method, direct business expenses are assigned directly to the business, while indirect business expenses are assigned to the home office according to a certain allocation method, such as square footage or number of rooms. 

Simplified method makes use of a prescribed rate, which is then multiplied by the maximum square footage that can be occupied by the home. The prescribed rate for the year 2022 is $5 per square foot, with a maximum of 300 square feet per application. 

If the taxpayer intends to take home office expenses based on the actual method, then the taxpayer is required to file form 8829. However, if the taxpayer intends to take home office expenses based on the simplified method, then the taxpayer is only required to fill out line 30 of schedule C. 

The Simplified Method really simplifies many calculations just like its name suggests.  

• The taxpayer does not need to calculate depreciation for their home if they use the Simplified Method. 

• At the time of selling the use of the property, there is no need to consider depreciation recapture. 

• A taxpayer does not need to differentiate between personal and business use of his or her home in order to take advantage of itemized deductions for mortgage interest, real property taxes, and casualty losses related to his or her property. 

Foreign Earned Income Exclusion for U.S. Expats (FEIE)

The Foreign Earned Income Exclusion (FEIE) is the most prominent and certainly the most utilized — tax advantage for U.S. expats, allowing Americans to exempt all or a portion of their foreign earned income from U.S. taxes.

The Foreign Earned Income Exclusion applies (FEIE) only if the Taxpayer (TP) meets all the following requirements

-          The taxpayer is a qualifying individual

-          Has qualified foreign earned income

The Foreign Earned Income Exclusion is limited to a certain amount, which is adjusted annually for inflation.  To avail this exclusion, the TP needs to file Form 2555

For tax year2022, the maximum exclusion is $112,000 per person. If two individuals are married, and both works abroad and meet either the bona fide residence test or the physical presence test, each one can choose the foreign earned income exclusion. Together, they can exclude as much as $224,000 for the 2022 tax year.

Be mindful when you are claiming Foreign Earned Income Exclusion and Foreign Tax Credit / Deduction.

 

Who is a Qualified Individual?

Those who have lived abroad for a specified amount of time during the tax year qualify for the foreign income tax exclusion. However, partial-year exemptions are allowed if taxpayer recently moved to a foreign nation or returned to the United States during the tax year.

The FEIE is available to expats who either:

-          Work outside the U.S. as employees, whether for a U.S. or non-U.S. employer

-          Work outside the U.S in a self-employed or partner capacity

AND

-          Pass either the Bona Fide Residency Test or the Physical Presence Test

What is Qualified Earned Income?

This exclusion applies exclusively to earned income and not to passive or investment income, such as interest and dividends. Foreign income comprises the following:

-          Salary

-          Wages

-          Bonuses

-          Commissions

-          Independent earnings

If taxpayer living and have investment or passive income, the taxpayer don't qualify for the FEIE.

How to exclude Foreign Earned Income?

If the taxpayer has eligible income, Form 2555 must be filed in order to claim this exclusion.

How much can be excluded?

If taxpayer qualify for a foreign earned income exclusion from U.S. taxes as an expat, the taxpayer can exclude up to $112,000 or more if you incurred housing costs in 2022. Each spouse can claim the FEIE if both spouses satisfy either the bona fide residency requirement or the physical presence condition.

Let us handle your tax planning, tax preparation and tax compliance. To address your case, please dial 908.300.9193 or email services@surefintaxsvs.com

The taxpayer needs to consider other related reporting requirement 

       -          USA Taxpayer and Foreign Financial Reporting Requirement

o   https://surefintaxsvs.blogspot.com/2022/05/usa-taxpayer-and-foreign-financial.html

-          Foreign Tax Credit [FTC] - A Anti Double Taxation Tool. What Do You Need to Know?

o   https://surefintaxsvs.blogspot.com/2022/08/foreign-tax-credit-ftc-anti-doube.html

Foreign Tax Credit [FTC] - A Anti Double Taxation Tool. What You Need to Know?

The Foreign Tax Credit (FTC) is a money-saving credit that the IRS offers to help offset the penalty of double taxation. Four conditions must be met by the taxpayer: 

• Taxpayer must have a foreign tax liability that was either paid or accrued during the current tax year,  
• The tax must be assessed on income,  
• The tax must be imposed on you as an individual, and  
• The tax must have originated legally in a foreign country.  

When it comes to foreign tax, the taxpayer has two options. Essentially, taxpayers can choose annually between the international tax credit and the itemized deduction for foreign taxes. 

 

The credit is more advantageous than the deduction since credits lower taxes dollar-for-dollar, but deductions do not. In certain circumstances, however, it may be advantageous to claim the deduction rather than the foreign tax credit.  

 

There are a few exceptions to the general rule that taxpayers must file Form 1116 to claim the foreign tax credit if they intend to utilize it. If any of the following are true, the taxpayer may claim the foreign tax credit without filing Form 1116:  

• Passive income is the foreign income source for the tax year. 
• The total amount of qualified foreign taxes for the year cannot exceed $300 USD or $600 USD if submitting a combined tax return. 
• Gross foreign income and foreign taxes are disclosed on payee statements such as Form 1099, dividend or interest 1099. 

In general, this will only apply to those with a very little amount of foreign-sourced income tax liability. 

For instance, if you own shares of a foreign company and receive a tiny dividend in the amount of $200 or something similar. The IRS does not require you to file Form 1116 in these instances, but you can still claim the foreign tax credit on the dividend or interest income you earned from these assets. 

 

Certain sanctioned countries are ineligible for a foreign tax credit for foreign income taxes levied by, paid to, or accrued to them. Even though FTCs are not permitted for these taxes, the taxpayer may claim an itemized deduction for them in certain circumstances. 

FTC is a nonrefundable credit. When FTC is limited in a specific year, foreign taxes that cannot be utilized in that year can be carried back or carried forward. 

 

To claim a credit, the taxpayer may be required to submit multiple Form 1116. Allow us to assist you obtain credit. To address your case, please dial 908.300.9193. 

TaxTips: Rental Income and Taxation | What You Need to Know?

Any U.S. citizen or resident alien gets taxed on their worldwide income, regardless of whether it was earned domestically or abroad. If you own a rental property in a foreign country, you must fulfill a few additional requirements while filing your U.S. tax return. 

Let's explore what you need to know about the taxation of real estate rental income, especially foreign real estate rental revenue. 

 

Key Points 

 

For a thorough understanding of the tax consequences of your rental property under U.S. law, you must understand the following taxation factors. 

1. The property's ownership – how do you acquire it? How you hold title to the real estate property may affect the tax calculation of your rental income and capital gains tax at the time of sale. If you acquired the property through a company or a trust, you must file additional IRS papers. If you inherit property, you may be required to complete form 3520. Sure Financial and Tax Services LLC can advise you on this matter. 

2. Nature of Rental Income - What kind of income does it represent? Your rental income from real property may be taxed or exempt. Your rental loss may or may not be deductible. All of these factors depend on the classification of rental real estate and rental income category. Consult with us for assistance with this. You must distinguish between revenue from personal property, income from investment property, and income from commercial real estate. 

3. Foreign currency conversion rate: When the real estate is located outside the United States, you must examine and account for whether or not the rental activity qualifies as a Qualified Business Unit for currency conversion purposes. This determination resulted in numerous taxing factors. Sure Financials and Tax Services, LLC can provide assistance with this. 

4. Depreciation: In order to determine rental income, you must deduct depreciation on the building in addition to other expenses. Depreciation calculations vary from country to country. Foreign property is depreciated differently when it comes to United States taxes. Cost of acquisition, cost of improvement, and authorized and permissible depreciation play a significant role in determining depreciation. The depreciation claimed as a tax deduction today may be taxable income at the time of real estate sale. 

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6. A double taxation treaty with a foreign government stipulates that every U.S. citizen or resident alien gets taxed on their worldwide income, regardless of where it was earned. Consult Publication 901 for information on double taxation treaties. Form 8833, Treaty-Based Return Position Disclosure, may be necessary in certain circumstances. Regarding Section... This is a complex issue that requires the assistance of a tax expert. 

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8. Credit for foreign taxes, if any: Every nation has its unique tax rules and computation method. If your rental property is located in a foreign country, you may be required to pay taxes on the rental real estate revenue to that country. Since U.S. citizens and permanent residents are taxed on their worldwide income, foreign rental income is also taxed in the United States. However, the good news is that you can claim the foreign tax you paid as a deduction or credit, with the credit being more advantageous. For more information, consult Form 1116 - About Form 1116, Foreign Tax Credit (Individual, Estate, or Trust) or contact Sure Financials and Tax Services LLC. 

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10. Expenses Related to Rental Activity: During your rental period, you may have incurred expenses, paid tax and interest, and incurred other costs. For permitted expenses, consult Schedule E - About Schedule E (Form 1040), Supplemental Income and Loss. 

Regardless of your actions, you must keep records to verify your claim. Providing supporting paperwork is required if you are claiming cost-of-improvement depreciation. 

  

At the time of the sale of the rental property, you are required to retain records of the purchase price, any upgrades, depreciation claimed in the past, and rental losses that were not permitted in the past. 

Refer https://surefintaxsvs.blogspot.com/2022/05/irs-record-keeping-requirement.html for IRS record keeping requirement.