Federal Tax News for Individuals: February 2024

Working From Home?

woman working from home

With so many people working from home, they may refer to their workspaces as "home offices." But do those spaces qualify them for home office tax deductions? Indeed, there are specific requirements workspaces must meet to qualify for deductions.

Employees currently don't qualify for home office deductions if they're required, or want, to work remotely. For self-employed individuals, a portion of the home must be used regularly and exclusively to conduct business. Also, to qualify, the home must be the taxpayer's principal place of business. Contact us for additional qualifications.

Deduction vs. Credit?

cutting taxes

One of the most common misunderstandings about filing an income tax return is the difference between deductions and credits. Deductions reduce the amount of a taxpayer's income before tax is calculated. For example, on your individual return, you can either take the standard deduction or itemize deductions if it will reduce your taxable income more.

Credits, on the other hand, reduce the actual tax due, dollar-for-dollar, generally making them more valuable than deductions. Some credits, such as the Child Tax Credit, are partially or fully refundable, meaning that if a taxpayer's bill is less than the amount of the credit, the taxpayer can possibly receive the difference as a refund.

It Pays to Be Energy Efficient

energy efficiency

The IRS announced that it will propose regulations to implement the product identification number (PIN) requirement with respect to the energy efficient home improvement credit. Beginning Jan. 1, 2023, the credit (subject to certain limits and caps) is equal to 30% of the total amount paid for certain qualified expenses. These include qualified energy efficiency improvements, residential energy property expenses and home energy audits.

Beginning in 2025, taxpayers claiming the credit must also satisfy a PIN requirement for certain products. Specifically, an item will only qualify for the credit if it is produced by a qualified manufacturer and a PIN is included on the taxpayer's return.

What Exactly Is Gross Income?

income-producing activity related to marijuana

Federal tax law defines gross income as income from all sources, unless excluded by law. In one case, a married couple was assessed an accuracy-related penalty for unreported income from illegal marijuana manufacturing and sales. The couple argued that the IRS lacked direct evidence linking them to any income-producing activity related to marijuana. However, if an activity is illegal, the IRS's evidence requirement is minimal.

In this case, the IRS was able to prove a nexus between the taxpayers and the illegal manufacture and sale of marijuana. Based on the IRS evidence and the taxpayer's failure to cooperate, the U.S. Tax Court upheld the penalty. (TC Memo 2023-150)

Data Security at the IRS

data breach

How secure is private tax data following a "historic leak of taxpayer information" over three years ago? That's the focus of a letter sent by U.S. House Ways and Means Committee Chair Jason Smith (R-MO) to IRS Commissioner Danny Werfel. Two leaks by an IRS contractor exposed tax data of former President Donald Trump and other wealthy taxpayers.

The letter asks the Treasury Dept., the Justice Dept. and IRS watchdog groups to explain how the leaks happened and what the IRS is doing to prevent future breaches. Werfel responded that the IRS has implemented technology, training and enhanced controls that "significantly strengthened information security." Click here to read the letter.

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