Edward A. Lyon, JD
TaxTuneup.com, Inc.
3416 Shaw Ave #5
Cincinnati OH 45208
513.321.2821
elyon@taxtuneup.com
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Vacation
Vacation expenses may be
partially deductible if you combine your vacation with a deductible business
trip. If the primary purpose of your trip is business, your transportation
costs to your destination are deductible even if you spend extra time on
vacation at your destination. Generally, meals and lodging are deductible
for the length of your business stay, but not for vacation time. However,
there are three ways to write off meals and lodging for vacation time:
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If you tack vacation days onto a business
trip to qualify for an airline Saturday stay discount, your meals and
lodging for the extra days are deductible even if you use them for
vacation.
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If your business keeps you away from home
on a Friday and the following Monday, you can deduct meals and lodging for
the weekend, even if you use it for vacation.
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If you take your spouse, you can deduct all
of their costs if there's a business purpose for his or her presence.
Otherwise, their airfare, meals, and other costs are on your dime. You can
still deduct 100% of any expenses you would have paid for yourself. For
example, if your hotel room rate is $140 for yourself and $160 for
yourself and your spouse, you can deduct the full $140 you would have had
to pay for yourself. The same goes for your rental car. Keep a log or
diary to prove the primary purpose of your trip. (See
Travel and
Convention costs.)
Vacation Home
Your vacation home gives you most of the same tax breaks as your primary residence. You may also
get the chance to earn some tax-free income. Here's how the vacation home
tax rules work:
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You can deduct the interest you pay on up
to $1 million of acquisition indebtedness to buy your primary residence
and one extra residence. This means you can deduct the interest you use to
buy a second home so long as the total debt on your primary residence and
second home does not top $1 million. If the total tops $1 million, you can
still deduct the interest you pay on the first $1 million of acquisition
indebtedness. Obviously, you'd want to write off the highest rate mortgage
first to maximize your break.
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You don't actually have to buy a house, or
even a condominium, to enjoy a second-home tax break. You can deduct the
interest you pay on a loan secured by a time-share, boat, or camper so
long as it includes sleeping, cooking, and toilet facilities. You can even
deduct the interest you pay on a vacation home if your primary residence
is a rental.
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You can deduct
Property Taxes on an
unlimited number of vacation homes.
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If you rent your vacation home for 14 days
or less, you can claim the rental income tax-free.
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If you convert your vacation home to your
primary residence, then later sell it, the former vacation home will then
qualify for the $250,000 exclusion for gain on the sale of your home.
If you rent your vacation home for more than
14 days, your rental income will be taxable, but you can still use your
mortgage interest, property taxes, and other expenses to shelter your
income. There are two ways to figure your deductible expenses, depending on
whether the home qualifies as rental property or residential property. If
you use the home personally for more than the greater of 14 days or 10% of
the rental days, the home qualifies as residential property. If you use it
personally for less than the greater of 14 days or 10% of the rental days,
the home qualifies as rental property. Personal use includes:
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days your family uses the house
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days you rent the house for below-market
rates
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days you trade the use of your home for
someplace else
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time you donate to charities, to offer at
auction or as prizes (These donations don't qualify for charitable gift
deductions. This may be no problem if you use the home enough to treat it
as a personal residence. But if you're trying to hold down personal use to
treat your home as rental property, it's best to avoid donating use of the
home.)
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Personal use does not include time you
spend maintaining the property or prepping it for tenants.
If you use your vacation home for the greater
of 14 days or 10% of the rental days, you have to report the income, but you
should be able to write off enough expenses to avoid paying tax on the
income. Here's how it works:
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Report your rental income on
Schedule E.
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Deduct your rental expenses against rental
income on Schedule E.
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Finally, deduct the personal portion of
your Property Taxes and
Mortgage Interest as
Itemized Deductions on
Schedule A.
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To figure the rental portion of your
mortgage interest and property taxes, divide the number of days of fair
rental by the number of days of total use. Personal use for figuring this
amount includes days the house stands empty. So you can actually divide
the number of days of fair rental into the number of days of the year.
That percentage of mortgage interest and property tax is deductible as a
rental expense on Schedule E.
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To figure the rental portion of your
maintenance and utilities, divide the number of days of fair rental by the
number of days of total use (including fair rental and personal use).
Personal use here does not include days the house sits empty. So the rental
portion of maintenance, supplies, and utilities will be a higher
percentage of the total expense. That portion of maintenance and utilities
is also deductible as a rental expense on
Schedule E.
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You can also deduct the cost of renting the
house. This includes Advertising, commissions to rental agents, and any
costs travel to prepare the house for rental. Any operating expenses you can't deduct are carried forward to future years.
Example: In 2000,
you use your ski condo for 21 days and rent it out for 21 days at $100 per
day. You spend a total of $14,000 on mortgage interest and property tax,
$6,000 on maintenance and utilities, and $200 to advertise the rental. You
report $2,100 as rental income. You deduct $805 worth of mortgage interest
and property tax (21 days of rental divided into 365 days, times $14,000
in mortgage interest and taxes), $3,000 of maintenance and utilities (21
days of rental use divided by 42 days of total use, times $6,000 of
maintenance and utilities), plus $200 of advertising expense, for a total
of $4,005. Your expenses shelter your $2,100 of income. You get no current
deduction for the $1,905 "loss" (income minus rental expenses), but you
can carry this amount forward to shelter rental income from the condo in
future years. You also deduct the remaining $13,195 mortgage interest and
property tax as an itemized deduction on Schedule A.
If you use your vacation home for less than
the greater of 14 days or 10% of the time you rent it, you can treat the
house as rental property. This lets you write off all rental expenses
against rental income. You may also be able to write off rental losses
against other income. Here's how it works:
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Report your rental income on
Schedule E.
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Deduct your rental expenses, including
Mortgage Interest and
Property Tax, plus
Depreciation against rental
income on
Schedule E.
(There will be no deduction for mortgage interest
or property taxes on
Schedule A.)
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If rental expenses exceed
rental income, you can write off the loss against any passive income you
might have. If your adjusted gross income is under $150,000 and the
average rental is longer than seven days, you may also be able to claim
the Rental Real Estate Loss Allowance
to offset ordinary income.
To figure the rental portion of your
expenses, divide the number of days of fair rental by the number of days of
total use (including fair rental and personal use). This applies for
mortgage interest and property taxes as well as maintenance and utilities.
There's no separate formula for "empty days" with mortgage interest and
property taxes as there is when you treat the home as residential property.
You can also deduct rental expenses such as advertising, commissions, and
travel.
If your personal use varies, so that your
home qualifies as rental property some years but not all, you can choose
whichever method gives you the greatest advantage.
Example: In
2007,
you use the condo just two days and rent it out for 48 days at $100 per
day. You spend the same $14,000 on mortgage interest and property taxes,
the same $6,000 on maintenance and utilities, and the same $200 to
advertise the rental. You report $4,800 as rental income. You deduct
$13,440 in mortgage interest and property taxes (48 days of rental use
divided by 50 days of total use, times $14,000 in mortgage interest and
taxes), $5,760 in maintenance and utilities (48 days of rental use divided
by 50 days of total use, times $6,000 of maintenance and utilities), plus
$200 of rental expense, for a total of $19,400. Your deductions shelter
the entire $4,800 rental income. You deduct the remaining $14,600 in
expenses, plus depreciation, against your remaining income as you are
eligible.
Variable Annuity
(See Annuity)
Variable Prepaid Forward
(See Tax-Engineered
Products)
Vasectomy
Deductible Medical Expense subject to the 7.5% floor. Thank God!
Viagra
Deductible Medical Expense subject to the 7.5% floor.
Viatical Settlement
(See Life Insurance)
Volunteer Expenses
Expenses you pay in the course
of your volunteer activities
are actually deductible as Charitable Gifts. These include:
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meals and lodging on trips away from home
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Travel expenses to and from
volunteer and charitable activities (actual expenses or 14 cents per mile,
plus parking and tolls)
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Telephone calls and office
supplies
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Convention costs
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a portion of organizational
Dues (the
organization can tell you how much)
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Uniform expenses, including laundry and
dry-cleaning expenses, for clothing not usable as ordinary street clothing
(Girl Scout uniforms, silly Shriners fezzes, etc.)
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