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Why Do Tax Brackets Matter?

Did you know that if your tax bracket goes from 15 percent to 25 percent, for instance, that this does not mean an increase of 10 percent in taxation.  Actually what it means is a 67 percent increase in taxation! The IRS calculates the increase by dividing this 10 percent change by 15 percent, which equals 67 percent. It designed this system so that when you make more money, you have to pay more taxes, but not just the percentage by which your tax bracket changed, but exponentially using hidden calculations.

Few people monitor their income to see how close they are getting to the  next increase in taxation.  If you are close to the next tax bracket, all you have to know is you are close, then you can do something about it.  You could place $5,000 into an IRA or many other strategies to keep from going higher.

What is so sad is to see people just hand over their tax information and then ask the preparer to just get it done.  Then most of the time we trust the tax preparer and sign the return and send it off.  With good records, a better understanding of tax deductions and tax brackets, and some forethought, the average employee can be saving $1,000 to 3,000 in taxes every year. Go to www.moneymastery.com for more information on how to reduce your tax burden by up to 50 percent.

IRS Rules for Deducting Transportation Costs for Trips in the U.S.

Okay, more IRS requirements for deducting transportation costs. Knowing these rules can be an important way to save valuable tax dollars in your small business venture. Don’t just dismiss these deduction options, they can save you lots of money all while allowing you to combine business with pleasure travel.

So let’s say you want to go on a little trip to San Francisco, and while you’re there you want to meet with prospective clients in order to promote your business. You love San Francisco, especially the great food. While there, you will talk to distributors and meet with potential clients you have set appointments with in writing before you take the trip. You will leave on Thursday and conduct some meetings on Friday and Monday. Based on this information, how much of your transportation costs to San Francisco are tax deductible?

Because you spend more than 50 percent of your trip days on business (don’t forget that travel days are counted as business days), you can deduct 100 percent of your transportation costs to and from San Francisco.

The tax-saving tip to remember for U.S. travel is:

Spend more than 50 percent of your days on business and you can write off 100 percent of your transportation costs.

It is very important when deducting transportation costs to know how many days of the trip are considered business days since the number of business days will dictate how much of your transportation costs can be written off. In an upcoming postet’s discuss in further detail the rules that determine what can be considered a business day.

IRS Rules for Deducting Transportation Expenses for Business Conventions or Seminars

So you have a small side business and you want to combine business with pleasure as you travel to a seminar or convention. The rules governing transportation deductions for this kind of travel are different than any other kind of travel.

To understand these rules, I’ll use my example traveler, Loni again. Remember Loni was traveling to Las Vegas to attend a tradeshow (convention). She planned to work the tradeshow for two days and play the other three days of the convention. Loni took one day to travel the 650 miles from Evanston, Wyoming to Las Vegas and one day to travel back. Those two travel days can also be considered business days, so Loni spent four days on business and three days playing, for a total of seven days.

She needs to answer the following questions to determine how much of her transportation costs are deductible:

  1. Is this a business trip? Yes.
  2. Is it a trip to a business convention or seminar? Yes.
  3. Is Las Vegas outside the defined North American area? No.
  4. Were more than 50 percent of trip days, including travel days, spent on business? Yes (four days is more than 50 percent of seven days).

SO

Loni’s gasoline and other car transportation expenses to and from the Las Vegas tradeshow are 100 percent deductible.

The tax-saving tip to remember about travel for conventions or seminars is:

Spend more than 50 percent of your days on business and you can deduct 100 percent of your transportation costs.

IRS Rules Governing Transportation Cost Write-offs

As I mentioned in previous posts on deducting travel expenses, transportation costs to and from your business travel destination are governed by rules separate from On-the-Road Expenses. Transportation costs include the expenses you incur traveling to and from your destination. These costs include gasoline, airfare, train fare, etc. In order to deduct these expenses you must take one of three kinds of busi-ness trips, each one being governed by a separate set of rules:

  1. Foreign Business Trips
  2. U.S. Business Trips
  3. Convention Trips

Rules that Govern Transportation Deductions for Foreign Business Trips

Suppose you want to take a business trip to Montreal, Canada because you speak French and know that you can find prospective business there. But while there you also want to have some fun. So, you decide to spend one day doing business and the other five days having fun. How much of the transportation costs for that six-day trip to Montreal will be tax deductible? The IRS helps you determine this by answering the following questions:

  1. Is this a business trip? Yes (you will have shown your intent to do business before the trip by contacting in writing people with which you wish to do business while in Montreal).
  2. Is this a trip to a business convention or seminar? No.
  3. Is Montreal outside of the 50 United States? Yes.
  4. Is the trip to be less than one week excluding the day of departure? Yes (because you will be gone 6 days total).

In this case, transportation expenses to and from your business destination to Montreal are 100 percent tax deductible!  Aren’t you glad to know that you can spend just one day doing business in Montreal and spend another five days enjoying yourself while deducting all of the transportation costs to and from Montreal? This is known as the exciting “one-week loophole.” Remember…

If you are on a foreign business trip and you return in less than one week, you can deduct 100 percent of your transportation regardless of the number of days worked.

Okay, let’s consider a different scenario. Let’s say you don’t want to come back in less than one week. Instead, you want to conduct your business in Montreal on one day and then go to Prince Edward Island for the remaining nine days and have fun. How much of your transportation costs can you deduct?

Here are the parameters of your trip:

  1. It is a business trip (because you have documented this in writing as noted above).
  2. It is not a convention or seminar.
  3. It is outside the 50 United States.
  4. It will takes more than one week.

Now ask yourself the following:  Were less than 75 percent of the days spent on business, including travel days? How do you answer this? Well, for starters, don’t forget when calculating time spent on actual business that you may count the days traveling to and from your destination as “business days.” So, in this case, it takes you one day to travel to Montreal and one day to travel back home, plus one day actually conducting business. So you have really spent three days doing business and seven days having fun. Do three days constitute more than 75 percent of your 10-day trip? No. So in this case, transportation costs that you can deduct are equal to the ratio of business days to total trip days. So, if your business days are three out of a total of 10 trip days, the amount of transportation you can deduct is only 30 percent. That’s two-thirds less expenses you can deduct because you didn’t make it home in less than one week. Therefore, the tax-saving tip you should remember about foreign business trips is:

Come back in less than a week or conduct business 75 percent of the time you are on the foreign trip so you can deduct 100 percent of your transportation costs.

I will detail more rules about transportation expenses in upcoming posts.

Can I Deduct Travel Expenses for a Cruise?

You may have heard that under some conditions, you can deduct a cruise as a business expense (if you attend a cruise ship convention, for example). It is possible to deduct some of the expenses for such travel, but the rules governing cruise write-offs are constantly changing. I recommend you consult with your accountant or with the Tax Reduction Institute (TRI) for more information on how to meet the requirements for taking these deductions.

IRS Rule for What Constitutes a Business Day When Traveling

As I have noted in the last three posts, business travel can be a great tax deduction, but there are rules for deducting these expenses properly. If you know the rules, you can take these deductions with confidence, all while enjoying some time away from home. In this post I will cover the rules for what constitutes a business travel day.

The IRS considers each day you are on the road traveling as a “busi- ness day.” That means that you don’t have to wait until you get to the seminar or business meeting before you can deduct 50 percent of your food and 100 percent of your other on-the-road expenses (which I outlined in my last post Requirements for Deducting On-the-Road Travel Expenses). You can begin deducting them the minute you get onto the road.

I’ll use my example traveler, Loni, to illustrate:

Loni decides to travel to Las Vegas by car from her home in Evanston, Wyoming. She gets in the car on Thursday afternoon at about 3:00 p.m. and begins driving towards Las Vegas; it will take her approximately eight hours to get there if she drives straight through. She stops about 6:00 p.m. to eat at a nice little roadside restaurant and pays $10 for the meal. She doesn’t keep a receipt for her dinner but does write it in her tax diary. Even though she hasn’t reached the trade show yet, her time on the road can still technically be considered a business day because she’s making efforts to get to a place where she will conduct the actual business meetings; thus, all of her life-sustaining expenses are
deductible.

Now, let’s suppose instead that Loni decides to leave for the trade show in Las Vegas about five days early so she can stop in Salt Lake City along the way to ski and have fun with friends. The IRS has a rule that says she should try to travel at least 300 miles every day if she wants to count each of those traveling days as business days. To figure whether you are within the bounds of this rule, take the number of miles you are driving to your destination and divide by 300. Round up for fractions. In Loni’s case the total travel miles (if she took a more direct route and did not stop in Salt Lake City) from Evanston to Las Vegas are 650 miles. She would take that 650 miles and divide by 300, which gives her a little over two days to get to Las Vegas if she wants to write off the expenses she incurs while on the road. Does she have time to stop in Salt Lake and ski? Maybe, but it would have to be a very quick trip. Maybe Loni decides not to ski in Utah on the way to the tradeshow, but you can see from this example that it could be possible.

To further understand how this rule works, let’s suppose that instead ofHamburger going skiing, Loni decides she wants to take her husband with her to the trade show in Las Vegas. She certainly doesn’t feel like traveling 650 miles alone. And besides, she has hired her husband, Kurt, to handle all her office and computer equipment, so she wants him to browse around the trade show and get new ideas for the best ways to update her home office. Because he’s going to be at the trade show conducting his own business and he is her employee, Loni can deduct all of Kurt’s traveling expenses as well.

Now Loni decides that taking her three kids to Las Vegas would be fun, too, so she packs up the whole family in the car. What can she deduct of the costs she will incur to take her entire family to the show? She can deduct anything she would have spent had she gone alone.

Loni’s Deductions If She Takes Her Entire Family

Gas: Yes, she would have used fuel to drive either way. However, the rules that govern this deduction are covered under the “Transportation” category, which I will cover in an upcoming post.

Tolls: Yes, she can take these no matter who travels with her.

Lodging: Yes, if she has to stay in a room then that hotel room is deductible, but only the portion that the hotel or motel charges for a single occupant.

Food: Yes, but only 50 percent of her own meal costs and not those of her three growing children.

Other: Yes, anything she might have to purchase for herself, but not for those in her family. For example, let’s say Loni wanted to get her hair done in Las Vegas at the hotel beauty salon. Could she deduct the cost of that haircut and style? Yes, at 100 percent. Now let’s assume she also wanted to have her daughter come with her to get a trim. Could she deduct the cost of her daughter’s haircut. No, because this is not an expense she would incur on her business travel if she were alone.

Suppose Loni wanted to get some dry cleaning done while she was at the trade show. Could she take this laundry to the hotel cleaners and then write off the expense? You bet. Remember, the IRS rule says that you can deduct any and all expenses (except for food) that you would incur while on the road at 100 percent.

More travel deduction ideas in my next post.

More on the Value of Deducting Travel Expenses…

In my last post, Why Deducting Travel Expenses Makes So Much Cents, I introduced you to the idea of starting a small side business for the purpose of making more money and saving valuable tax dollars. If you operate a business you have the opportunity to write off all kinds of trips that would not be possible if you were nothing more than a W-2 employee. That’s because the tax laws governing travel deductions are fairly liberal (believe it or not!) for the self-employed.

 

So how can you deduct travel expenses for your small business?

Let’s begin by defining what kind of travel is tax-deductible. First of all, the IRS says travel must be “business travel” in order to claim it. Business travel occurs whenever you travel away from home, overnight, or for a period of time sufficient to require sleep. “Aha!” you might be thinking, “I’ve been out of town on vacation in the last few years and had to sleep overnight, I bet all of that vacation would have been taxAirplane deductible.”

Well, no, it wouldn’t be unless you conducted some business while on that trip. “Yes, but what about the time I went to Hawaii and while I was there I passed out my business cards?” Can you write off such a trip since you seemed to conduct “business” while there? The answer is probably not, because in addition to sleeping overnight somewhere, you also must have a “primary intent to do business” before you go on the trip in order to claim the expense.

Suppose in order to do more business you need to travel from Washington D.C. to New York where you must give a seminar during the day; let’s further suppose that you then traveled home in the evening of the same day. Does that constitute business travel? No, because you didn’t sleep overnight anywhere. What if you travel 70 miles down the road from your office to a nearby city to give an early-morning lecture and you sleep over in a hotel in that city the night before to be sure you make it to the lecture on time? Is that considered business travel? You bet. The IRS has no minimum mileage requirement for travel as long as your intent to do business was present before you made the trip and you slept overnight. You can travel 10 miles or 10,000 miles, it doesn’t matter as long as you sleep overnight in a bed other than your own.

How can you show “business intent” before you travel? I’ll use the following example of a woman I’ll call Loni to spell this out.

Loni is a public relations consultant who just happens to love Las Vegas. When she found there was a tradeshow in Las Vegas where she could meet some potentially important editors to discuss one of her client’s consumer electronics products, she decided it would be a perfect opportunity for her to take in some of the new attractions she had been dying to see.

Before the tradeshow, Loni contacted by e-mail 10 different editors she wanted to speak with at the show and set appointments to meet them in her client’s booth. She conducted press briefings with these editors on the first two days of the show, and on the remaining three days, spent her time having fun on the town.

Was Loni able to write off the entire trip to Las Vegas? You bet. That’s because she met all of the business travel criteria.

  • She was away from home overnight.
  • She contacted, in writing, people with whom she wanted to conduct business before her trip.

Tip: Keep a copy of letters or e-mails showing that you had some business intent before making the trip.

Now, even though Loni was able to write off this trip because it was considered business travel, she still had certain IRS requirements to meet that dictated what expenses she could claim and what percentage of those expenses could be deducted.

In my next post I will go into more detail about these requirements, so stay tuned!

Reducing Taxes Comes Down to Good Documentation, Especially with Business Miles

If you have started a home-based business as a means to save valuable tax dollars, you know the tax savings you can enjoy.  You also know that in order to enjoy those tax savings with total peace of mind, you must keep good records and document everything.  This is especially true when it comes to business miles deductions.

Did You Know…

You have a choice about how you can deduct automobile expenses.  You can take “Actual” expenses, i.e. repairs, insurance, gasoline, property tax, etc., or you can deduct business mileage.  If you choose to take expenses, you must keep track of mileage anyway to prove what portion of the expenses were for business.  Because it is such a hassle to keep track of the odometer reading before and after each trip for business purposes, many people just don’t do it — they either guess at the end of the year, or just take all their auto expenses, whichever can save them the most money.  While the IRS audits fewer than 2 percent of all taxpayers, this one deduction, if taken improperly, can cause severe civil fraud penalties, the disallowance of all deducted business miles and additional fines.

Even though tracking auto mileage may seem to be a hassle, it really doesn’t Drivinghave to be.  With the “90-Day Rule” the IRS allows anyone the convenience of keeping track of business miles for only three months each year, and then multiplying by four.  Any three consecutive months of the year may be used so long as your business travel does not vary drastically.  We must strongly caution, however, that these three months must reflect a typical example of travel for the entire year.

This method of tracking makes it 75 percent easier and should allow you to sleep better after filing your taxes.  You can have total peace of mind by:

  • Knowing the rules on auto deductions.
  • Keeping track of all mileage for at least three months of the year (if you travel consistent patterns).
  • Documenting all miles using a tax diary.

What’s It Worth?

When these money-saving secrets are put into practice, you will find even more tax savings as you learn to track your mileage to your children’s activities like soccer tournaments, church activities, Boy Scouting, etc.  These miles, though not business related, are deductible under charitable contributions.  In our experience, this specific attention can save as much as $2,000 in taxes annually.

What Really Happens to a Second Income After Taxes…

The high cost of living is driving many families to seek second and even third incomes to help make ends meet. But what if that second job isn’t really worth it?  Families that take a closer look at their true tax burden as a W-2 employee are realizing that having both spouses work outside the home is actually costing the family money.

This is illustrated in Jane Bryant Quinn’s Woman’s Day article, “How to Live On One Salary.” In the article, Quinn highlighted an American family with a husband earning $40,000 per year (in 1995 dollars).  Every month the family was short on funds so this prompted the wife, Lori*, to get an administrative $15,000 per year job. When Quinn examined the economics of earning this extra income, the results were startling!

First, Lori had to pay $4,500 in federal and state taxes on her new salary.  Since they filed jointly, the family’s combined income was what established their tax bracket. Lori had Social Security withheld from her paycheck which added a non-deductible amount of $1,148 to her tax bill.  She also commuted 10 miles round trip, resulting in non-deductible commuting costs of $696. Child care expenses gave a partial tax credit, but Quinn figured that the amount spent beyond the credit was $4,250 per year. Lori also ateTax out each day, resulting in a non-deductible expense of $1,250 a year.  Now that Lori had a job, she had to have better clothing and more dry cleaning. Quinn assumed that Lori’s increased expenses here were an extra $1,000 per year, non-deductible, of course. Finally, with both spouses working, Lori wasn’t in the mood to cook. This resulted in more eating out and increased yearly non-deductible food costs of $1,000.

Add it all up and Lori’s take-home pay was a paltry $1,156 a year, for which she had to put up with the commute, boss and corporate hassles.  Her children also suffered by spending the majority of their day without either one of their parents. Without taking a close look at her true tax burden, Lori was doing her family more harm than good.

One of the best ways to earn a second income is to break out of the W-2 mindset and consider launching a home-based business.  If Lori had done so, she could have netted her entire $15,000 per year salary, representing an increase of almost 13 times her take-home pay as a W-2 employee.  Plus many of her expenses would be tax-deductible.

Of course Lori and her husband’s income would be higher in today’s dollars but so would the cost of living and the tax burden, so you can see this is an excellent example of just how inefficient a second-income can be for the average middle-class American family. If you are a stay-at-home mom, be sure you examine all the numbers carefully, including the tax numbers (or have your accountant do it) before you run out and get a job out of the home. It truly may not be worth your time to do so. Be sure you have examined all your stay-at-home work opportunities first, which offer a much better tax deduction than W-2 employment.