IRS Advises On Home Office, Local Tax Deductions

Anyone using a portion of their home for business purposes may be able to take a home office deduction, whether they are self-employed or an employee. Expenses that may be deductible for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, painting, and repairs.

Filers can claim this deduction for the business use of a part of your home only if they use that part of your home regularly and exclusively:

*As your principal place of business for any trade or business

*As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business

Generally, the amount one can deduct depends on the percentage of the home used for business. The deduction will be limited if one’s gross income from your business is less than the total business expenses.

Those who use a separate structure not attached to the home for an exclusive and regular part of the business can receive deductions for expenses related to it.

There are special rules for qualified day care providers and for persons storing business inventory or product samples. Those who are self-employed can use Form 8829 to figure home office deductions, and report those deductions on line 30 of Schedule C, Form 1040.

An employee has additional requirements to meet. The regular and exclusive business use must be for the convenience of your employer. For more information see IRS Publication 587, Business Use of Your Home, available at IRS.gov .

Filers may also be able to deduct certain taxes on federal income tax returns. Those qualified may take these deductions on Form 1040 with itemized deductions on Schedule A.

Deductions decrease the amount of income subject to taxation. There are several types of deductible nonbusiness taxes:

*State and local taxes: Filers can choose to claim a state and local tax deduction for either income taxes or sales taxes on their return. They can deduct any state and local income taxes withheld from their salary in 2007, estimated taxes paid to state or local governments, and any prior year’s state or local income tax as long as they were paid during the tax year. If deducting general sales taxes instead, deduct actual expenses or use the optional tables provided by the IRS to determine the deduction amount, relieving need to save receipts. Sales taxes paid on certain items such as motor vehicles and boats may be added to the table amount, but only up to the amount paid at the general sales tax rate.

*Real estate taxes: Deductible real estate taxes are usually any state, local or foreign taxes on real property. If a portion of the monthly mortgage payment goes into an escrow account and your lender periodically pays your real estate taxes to local governments out of this account, filers can deduct only the amount actually paid during the year to the taxing authorities. The lender will normally send a Form 1098, Mortgage Interest Statement, at the end of the tax year with this information.

*Personal property taxes: Personal property taxes are deductible when they are based only on the value of personal property, such as a boat or car. To be deductible, the tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year.

*Foreign income taxes: Generally, filers can take either a deduction or a tax credit for foreign income taxes, but not for taxes paid on income that is excluded from US tax.

For detailed information about the sales tax deduction, consult the instructions for Form 1040, Schedule A, Itemized Deductions, and the interactive State and Local Sales Tax Calculator found on IRS.gov. Remember that for the genuine IRS website be sure to use .gov.

Do not be confused by internet sites that end in .com, .net, .org or other designations instead of .gov. The address of the official IRS governmental website is www.irs.gov.