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Why claim home office? Considering not taking it.


jklcpa

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I'm working through a new client's return where both husband and wife have home offices in the McMansion. They are residents of PA, and PA and their local returns allows the home office expenses as unreimbursed business expense as a reduction of compensation.

Here's what I noticed happened on their 2015 return prepared by another CPA firm:  The only deductions on each of their 2106s is the home office deduction, and it was based on the actual, not the safe harbor. The totals of the two 2106s combined is about $3400 and gave no tax benefit because of not exceeding the 2% limitation, and the resulting reduction in mortgage interest and real estate taxes deducted on Sch A were reduced by a total of ~ $2000.

The end result is that there was no federal tax benefit of claiming the home office at all, and they lost deductions on Sch A of $2000. For federal tax, they are in the 33% bracket and hit the AMT.  The state benefit to them is a reduction in the PA tax of 3.07% and local reduction at 1.25%. The whole state/local tax savings on that $3400 of deductions is only about $148.

Why do this?  Am I missing something here?  They don't have to claim the home office deductions at all, and it would raise their mortgage interest and r.e. taxes on Sch A back to 100%.   Or I leave the basis for depreciation entered so I don't lose track of that information and use the safe harbor method, and then I can still take the mtg int & r.e. taxes at 100% on Sch A, and I think I can use the actual expenses on the PA and local.

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I agree, I have a husband/wife high income clients who have been in similar circumstances for years.

Claiming home office results in paying more taxes due to deductions lost because of the 2 % misc threshold,

complicated by itemized deduction phase out and by the AMT, which they are always in.

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for a Home Office on the 2106, the Mort Int and RE tax are not allocated to the business expense.  they remain on lines 6 and 10 respectively.  When using the form 8829 that goes to Schedule C, then yes the Mort Int and RE tax are reduced on the Schedule A.

On the ATX worksheet for the Home Office input there is  a note at the top that says: Per Pub 587, mort Int and RE tax for employee activities are deducted in full as personal items on Sched A.  These amounts will not allocate to an employee activity.

Still, even if it is not reducing these deduction on the Schedule A, I agree that it doesn't make much sense to deduct them if the total is not greater than the 2% of AGI.  Perhaps it is a case that the income fluctuates from year to year so they just calculate them every year to see if they help.  Certainly the AMT is also a consideration for federal.  But in some cases even if there is no benefit for fed because of AMT there is for state,  Of course, if the total is not over the 2% then no savings anyway.... but some people will do it  because they can charge for the form... .  

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I agree with you and that is how Drake handles the mtg int & RET also, but what made me question it was that the return from LY clearly has them limited, and has the worksheets showing the reduction.  I don't know if the preparer forced it, or if somehow a code was entered that shouldn't have been. It is on an 8829 worksheet tied to the 2106, and that is what made me even think about it, why they would have allowed the preparation like this. This couple are W-2 employees only.

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yes the 8829 is the problem.  It is not used when going to the 2106.  

seems odd to manipulate the program to get it to do something not in the best interest of the taxpayer..  Can't help but wonder if the preparer did not know or was inflating billable forms. :( 

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Oops sorry, it was only the worksheet for the 8829, BUT the Sch A mtg int and r.e. tax were definitely reduced. Weird, and I agree that padding of the bill might have been going on too.  These people did complain about the bill. There is a lot going on with this return, but the people are very organized and gave me that totals for everything that I needed to input very easily, and had all backup attached. Nice.

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if it weren't for the fact that it skewed the mort int and re tax deductions, you might could attribute it to the the philosophy of it being easier to just put it in than to explain why you didn't.  the preparer had to  do the math to see if it saved any... might as well leave it in.  

How many of us always put the tax prep fee on line 22 even though for most people it has no tax savings.  heaven forbid we leave off the safe deposit box. THEN  You get the call: "You left off my safety deposit box for $25".  (That is where they keep the quick claim deeds and the physical year reports) :)

 

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