Thinking of renting out your room for extra income?

Thinking of renting out your room for extra income?

Lots of people are trying to earn a few extra bucks by renting out a room in their homes. As far as taxes go, this comes with bad news and good news.

The bad news is that the rent you receive is taxable income that you must report to the IRS.

The good news is that your taxable rental income can be wholly or partly offset by the tax deductions you’ll be entitled to.

So, if you are one of the many people renting out rooms in your home to vacationers and tenants, remember this is considered taxable income. It must be included on your form 1040.

Interesting Facts About Taxes

Interesting Facts About Taxes

Can tax trivia be fun?  Here are some of the most amazing tax facts and tax trivia on the net.

The word “tax” is from the Latin taxo, meaning “I estimate.

In Texas, cowboy boots are exempt from sales tax. Hiking books are not.

There is no known civilization that did not tax. Even the very first known civilization, the Sumerians, recorded their tax history on clay cones.

Alabama is the only state in the United States to impose a 10¢ playing card tax for decks of cards purchased in the state. In contrast, Nevada issues free decks of card with every tax return filed.

In 1787, U.S. citizens were eligible to vote only if they were taxpayers.

The Rosetta stone, the most significant relic of Egyptian history, is a tax-oriented document. It was inscribed around 200 B.C. during the reign of the boy-king Ptolemy V. It was so important that it was written in three languages. In fact, a large percentage of all ancient documents are tax records of one kind or another.

Russian Emperor Peter the Great placed a tax on beards in 1705. He hoped that the tax would encourage men to have a clean-shaven look that was popular in Western Europe.

Excise taxes are also called “sin taxes.” They are taxes on alcohol, tobacco, and gambling.

 

 

What is a Tax Credit and How Does it Work?

What is a Tax Credit and How Does it Work?

A tax credit is a dollar-for-dollar reduction of the income tax you owe.


Tax credits reduce the amount of income tax you owe to the federal and state governments. Credits are generally designed to encourage or reward certain types of behavior that are considered beneficial to the economy, the environment or to further any other purpose the government deems important. In most cases, credits cover expenses you pay during the year and have requirements you must satisfy before you can claim them.

How tax credits work

A tax credit is a dollar-for-dollar reduction of the income tax you owe. For example, if you owe $1,000 in federal taxes but are eligible for a $1,000 tax credit, your net liability drops to zero. Some credits, such as the earned income credit, are refundable, which means that you still receive the full amount of the credit even if the credit exceeds your entire tax bill. Therefore, if your total tax is $400 and claim a $1,000 earned income credit, you will receive a $600 refund.

Types of tax credits

There is an array of tax credits available to all types of taxpayers covering a wide range of expenses and situations. As incentive for taxpayers to protect the environment, the federal government offers a credit for the cost of purchasing solar panels for use in your home.

To help families wanting to adopt a child, the federal adoption credit can reduce your tax bill to offset some of the costs you incur that are necessary to adopt a child. Other credits cover the expense of child and dependent care as well as education credits.

Comparing credits to deductions

Tax credits generally save you more in taxes than deductions. Deductions only reduce the amount of your income that is subject to tax, whereas, credits directly reduce your total tax. To illustrate, suppose your taxable income is $50,000 and you have $10,000 in deductions, which reduces your taxable income to $40,000. If that $10,000 would have been taxed at a rate of 25 percent, then the deduction saves you $2,500 in tax. If the $10,000 was a tax credit instead of a deduction, your tax savings is $10,000 rather than $2,500.

State tax credits

Many states that impose an income tax on residents often times offer tax credits. For example, if you live in California, you may qualify for a renter’s credit if you pay rent for your housing, your income is below a certain amount, and you meet other state requirements. Many states also offer tax credits similar to the federal credits. For example, many states and the District of Columbia offer credits that mirror the federal earned income credit.

Funny Tax Facts from Around the Ancient World

Funny Tax Facts from Around the Ancient World

Throughout history there have been many strange, unusual, and weird taxes. Many of them were implemented to raise additional revenue, while the purpose of others was to promote social change. Here are some of the strangest ones:

Ancient Taxes from Around the World

  • In Ancient Egypt, cooking oil was taxed, and on top of that, people had to buy their taxed cooking oil from the Pharaoh’s monopoly, and were prohibited from reusing previously purchased oil.
  • In 1705, Russian Emperor Peter the Great placed a tax on beards, hoping to force men to adopt the clean-shaven look that was common in Western Europe.
  • The French had a salt tax called the gabelle, which angered many and was one of the contributing factors to the French Revolution.
  • In 1885 Canada created the Chinese Head Tax, which taxed the entry of Chinese immigrants into Canada. The tax lasted until 1923 when a law was passed banning Chinese people from entering Canada altogether with a few exceptions.
7 Tax Deductions Self-Employed Workers Shouldn’t Overlook

7 Tax Deductions Self-Employed Workers Shouldn’t Overlook

Self-employment can bring more flexibility, but often it brings more pressure as well. You are both employee and employer, which means you can set your own hours and decide which projects you feel like taking on. It also means that if you don’t have any cash flow coming in, there’s no one to blame but yourself.

As taxes can get more complicated as self-employed, you must pay them quarterly and you owe a lot more in Social Security and Medicare tax, which in traditional jobs is split between employee and employer. But there is one big plus to being a self-employed person around tax time, and that’s all the deductions you can claim to lower your bill. Here’s a look at 7 that you don’t want to miss out.

1. Home office deduction
The home office deduction is one of the most popular self-employed tax breaks and also one of the most abused. You’re allowed to deduct expenses like electricity, heating, property taxes, and even your homeowners insurance as they relate to your home office. So if, for example, your home office takes up 10% of all the square footage in your home, you could deduct 10% of all the bills listed above as business expenses.

The big catch here is that you can only deduct home office expenses if that room is solely or primarily used for business. You cannot consider your living room as your home office just because that’s where you work from. You probably use it just as much, if not more, for personal purposes so it would not qualify as a deductible expense.

2. Self-employment tax deduction
Everyone pays Social Security tax and Medicare tax, as mentioned earlier. Social Security tax is 12.4% of your income and Medicare tax is 2.9%, for a total of 15.3%. You’re only responsible for half of that when you have an employer. Your company pays the other half. But when you’re self-employed, you must pay it all on your own.

The good news is that the government enables you to write off half of what you pay in these taxes (your employer portion) so you don’t have to pay income tax on this amount. This puts self-employed workers on an equal footing with traditionally employed workers.

3. Travel expenses
Whether driving to see a client in your local area or flying across the country to attend a conference, you can deduct any travel expenses you incur on behalf of your business. This includes flights, rental cars, hotel stays, and even ride-sharing fees. If you’re driving your own vehicle, you can deduct 58 cents for every mile on your 2019 tax bill. In 2020, this drops to 57.5 cents per mile.

The government isn’t just going to take your word on these expenses, so keep documents to prove what you spent. The same goes for the home office deductions you plan to claim above: Keep receipts or else the government could disallow them if it audits you.

4. Office supplies
Simple things like paper and pens, all the way to expensive pieces of equipment you buy for your business, can be tax-deductible, as long as you use them primarily for business and you keep all receipts to prove your expenses. Go back through your bank and credit card statements for the last year and note any business-related expenses you may have forgotten about. Highlight them or record them on a separate sheet of paper so you have all the numbers you need when you’re ready to file your return.

5. Professional education
Attending conferences, taking a professional development course, or pursuing an advanced certification to improve the quality of service you offer your customers are all deductible expenses as long as they relate to the business you’re currently running and you have the documents to prove your expenses.

Courses to help you branch out into a new, unrelated business wouldn’t count, though. It’s fine to write off a course in graphic design if you’re already a graphic designer, because it can help you improve your skills and the services you offer. But if you run a bakery and just decide to take a graphic design course on a whim, you can’t count this as a business expense.

6. Advertising
Paid advertising, like ads online or a TV or radio commercial, is a deductible business expense. The same goes for maintaining a business website and any billboard space your company pays for. Keep track of how much you spend on advertising throughout the year and hold on to those receipts.

7. Health insurance premiums
Self-employed workers don’t have an employer to help them cover the cost of their health insurance, so the government enables them to write off their premiums. This only applies to health insurance that you’re paying for on your own. If you get health insurance through your spouse’s company, you cannot write this off even if you’re self-employed. But you can write off premiums for yourself, your spouse, and any dependents if you pay the full cost of the health insurance premiums yourself.

This isn’t a comprehensive list of all possible self-employed business deductions, but it should give you a sense for what you can and cannot write off. Only expenses that are primarily or solely for your business are tax-deductible and you must have documents to prove all of these deductions.

And remember this list as you move into 2020, so you can start keeping records of all tax-deductible expenses to make next year’s tax season go much smoother.

Tax scams are in full swing. Here’s how to protect yourself

Tax scams are in full swing. Here’s how to protect yourself

  • “Don’t ever give out personal information to anyone you don’t know over the phone.”
  • The IRS will never make initial contact with taxpayers via an unsolicited phone call or e-mail. (The agency generally only contacts people by mail.) It doesn’t call about unexpected refunds, ask for personal information like credit or debit card numbers over the phone or make threatening payment demands. If suspicious, taxpayers can request that the caller send a letter.
  • Beware of e-mails or other communications posing as the IRS, promising a big refund or personally threatening you. Don’t open attachments or click on links in suspicious e-mails.
  • If a tax refund promised by a tax preparer seems too good to be true, it probably is. Ask some questions: Why is the refund coming out this way? Why am I getting such a large refund?

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