“Yogi Berra: Where have you been? Wife: I took Tim to see Dr. Zhivago. Yogi: What the hell’s wrong with the kid now?”

With the proliferation of spas almost everywhere you turn, it seems like the entire population is getting refreshed over and over. SO, we thought we would add to your refreshment, but of a different kind. We do hope you will feel great after the treatment in this financial and tax spa….

Home Office Deduction — A Brief Refresher

If part of your home is used for business purposes — you may be able to take a home office deduction. If so, expenses that can be deducted include the business portion of: your mortgage interest, real estate taxes, rent, utilities, insurance, painting, repairs and depreciation. To qualify, you must use part of your home that meets any of these four conditions:

• Exclusively and regularly as your principal place of business, or as a place to meet or deal with customers, patients, or clients in the normal course of your business. (TAXTIP: Be sure and take current photographs of the business area.)
• Or in connection with your trade or business where it is a separate structure not attached to your home.
• Or on a regular basis for certain storage use such as inventory or product samples.
• Or as rental property.

If you work as an employee, additional and special rules apply:

• You can claim this deduction only if the regular and exclusive business use of the home is for the “convenience of your employer” — and the portion of the home is not rented by the employer.
• If in fact you receive any rental allowance from your employer, to cover the business use of a portion of your home — you cannot deduct any related expenses whatsoever. In other words, you report the entire rental payments as additional income.

Understand the exact IRS definitions of these rules:

• “Exclusive use” means a specific area of the home is used only for trade or business purposes. Incidental use for family recreation or similar kills the entire deduction, however it’s possible to justify the exclusive use of part of a room — but not easy.
• “Regular use” means the area is used regularly for trade or business purposes. Minor or occasional business use is not regular use.

Investment activities do not qualify for a home office business deduction.

For more information, see IRS Publication 587, Business Use of Your Home (available at IRS.gov or by calling 800-829-3676).

Special Charitable Tax Deductions — A Brief Refresher

Giving cash to a recognized charity presents no problems (as long as they are substantiated under the new rules now in effect.) Here is a rundown of the other related expenses. The major category is probably “unreimbursed volunteer expenses”. Such expenses must be “non-personal, directly connected with, and solely attributable to providing the charitable services.”

• Office supplies and copying charges.
• Telephone and postage.
• Transportation and other travel charges such as lodging, meals, taxis etc. (Travel meals are subject to the usual 50% deduction limit.) There must not be any significant vacation, recreation, or personal pleasure in the travel.
• Local transportation from the taxpayer’s home to the place the charitable services are rendered.
• Use of an auto for charitable purposes is deductible at 14¢ a mile, plus parking fees and tolls.
• Tickets to a charitable event produce a tax deduction only to the extent the cost of each ticket exceeds the (fair market value) cost of the event itself (meals, entertainment, etc.)
• If you do not attend the event, return the tickets for resale by the charity — to enable you to claim a full deduction for the total ticket costs.
• The purchase of raffle, lottery, or bingo tickets is not a charitable deduction — no matter if you lose or win. (But if you win, the winnings are taxable.)
• Sports fans can deduct 80% of their donations to a college or university for the right to buy the tickets. However, the costs of: the tickets themselves, use of a skybox, guest passes to visit the skybox or reserved parking privileges — are not deductible as charitable contributions.

A taxpayer who permits a charity to use his property without charge (e.g., their house for a charity affair, or as an office, as a raffle prize, etc.) cannot claim a charitable tax deduction. Interest-free loans of up to $250,000 to a recognized charity are not subject to interest or imputed interest rules.

Executor’s Duties — A Brief Refresher

Sooner or later, most of us will become the executor of someone’s will — most often that of their deceased spouse — but one could be named by any friend or relative for that duty. An executor’s specific duties vary, depending on state law and the terms of the will. Typically, an executor is the person ultimately responsible for the disposition of the assets of the deceased. But along the way to that ultimate goal, there are a number of steps and duties to be performed. Thus, an executor:

• Consults, as necessary, with an attorney, CPA and other advisors with whatever needs to be done.
• Arranges for probate of the will and obtains the probate court’s approval to act on the estate’s behalf.
• Takes custody of the decedent’s assets, submits an inventory to the probate court, and obtains appraisals of real estate and other assets whose values are not readily ascertainable.
• Notifies creditors of their rights and handles their claims.
• Pays the estate’s debts and expenses.
• Manages assets such as bank and brokerage accounts, and/or real estate — and makes prudent investment decisions.
• Files federal and state tax returns on the estate’s behalf.
• Distributes remaining decedent’s assets according to the terms of the will, and
• Makes a final accounting to the beneficiaries and the court.

If the decedent was well organized and prepared a schedule of assets, then identifying and collecting property can be relatively simple. Often, however, it’s the executor who must uncover hard-to-find assets…and sometimes he or she is really not an expert or trained in this area of examination and detection….

(Most of the information in this and the following section has been provided by the law firm of Valensi Rose PLC, Century City, Los Angeles, CA.)

Some Definitions and Questions Regarding the Above

Executor, or Executrix (female), or Personal Representative: All are terms for the executor (see preceding section).

Administrator: Someone appointed by the probate court to administer the estate of a person (decedent) who dies without a will.

Trustee: A person appointed to manage a trust, including various trusts created by the will of a decedent. The person appointed to manage the trust can then fulfill many of the executor’s duties. Often, the executor and trustee are the same person.

Executor’s Fees: Payment is set by the will or otherwise provided under state law. Some states provide a fixed payment schedule while others allow “reasonable compensation,” which typically depends on the size and complexity of the estate and the time the executor devotes to these duties.

Personal Liability of the Executor: An executor may be held personally liable to the estate’s beneficiaries or creditors for certain errors and omissions — or for mismanagement of assets. Examples: failing to file tax returns, making inappropriate investment choices, allowing insurance policies to lapse, or self-dealing (such as buying assets from the estate at below-market prices, or taking funds in excess of the proper fees, etc.).

Help for the Executor: The executor can hire CPAs, lawyers, investment advisors, or other professionals — at the estate’s expense and as reasonably needed.

Must You Take the Job: Even if you told the decedent that you will serve as executor, you are not legally required to do so. Think carefully before you accept the appointment, since once you do — you can’t just walk away or resign. You will need to notify the probate court of your intention to resign and you may need to submit an accounting to the court or meet certain other requirements. Even if a family member or close friend honors you by naming you as executor, you may be in for a complicated and time-consuming job that you are little suited for (if you do decline to serve, the next named executor then takes over).

Rental Property — A Brief Refresher

Rental income is any payment received for the use or occupation of property. Since most landlords report on a cash basis, they count payments received as income in the tax year and deduct expenses as paid in the same tax year. Other payments that may need to be reported as rental income as received are:

• Advance rent payments.
• Early lease termination fees.
• Property or services received in lieu of money.
• Lease payments with an option to buy.

Generally, security deposits are not counted as income because they are, by agreement, refunded at the end of the lease period. However, any funds withheld from the deposit are counted as income in the year they are retained. Deposits used as final lease payments are considered advance rents and counted as income in the period they are received.

The owners can deduct “ordinary and necessary expenses for managing, conserving and maintaining” their rental property. Necessary expenses include such items as interest, taxes, insurance, utilities, repairs, and maintenance. Additionally, the cost of the rental property (excluding the cost of the land) and subsequent improvements may be recovered through depreciation deductions.

Moving Expenses to a New Job — A Brief Refresher

These expenses may be tax deductible if you can satisfy the distance and time tests for a job-related move — either as an employee or self-employed. Short-term or part-time moves generally do not qualify.

The distance test is that your new workplace must be at least 50 miles further from your former home — than your previous workplace was from your former home. EXAMPLE: If your old job was 5 miles from your former home, your new job must be at least 55 miles from your former home.

The time test requires that you work full-time for at least 39 weeks during the 12 months immediately after your move. If you are self-employed, the time test requires that you work full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after your move.

Reasonable moving expenses are deductible and include the costs of moving your household goods and personal effects to your new home. You can also deduct the expenses for traveling to your new home, including lodging costs.

You cannot deduct as moving expenses: meals eaten in transit between your old and new homes; any part of the purchase price of your new home; or moving expenses for which you were reimbursed (unless you reported such reimbursements as income).

Disclaimers

There are some readers out there who may be in the financial position to turn down an inheritance — particularly when it may save them (and family) future estate taxes. “A disclaimer is an irrevocable and unqualified refusal to accept an interest in property.” There are two kinds of disclaimers:

• In a regular disclaimer the disclaimed property then passes according to the terms of the will (or trust) as if you had died before him or her.
• In a qualified disclaimer you can redirect the property to anyone you designate — without any adverse gift or estate consequences.

Since most of you will choose a qualified disclaimer for the greater flexibility, here are the rules under Internal Revenue Code Section 2518:

• The disclaimer must be in writing.
• The disclaimer must be delivered within nine months after the transfer is made.
• The person disclaiming has not accepted the disclaimed property interest or any of its benefits.
• As a result of the disclaimer, the property interest passes to someone other than the disclaimant.

There are many possibilities in disclaiming. EXAMPLE: Deceased wife leaves her substantial estate to her husband — who is both rich in his own right (and elderly). When he dies, there will normally be a large estate tax to pay (on both his assets and those inherited from his wife). Husband makes a qualified disclaimer and directs that his wife’s entire estate be left to the couple’s three children instead. Result: Very large savings in ultimate estate taxes by reducing husband’s eventual estate by the disclaimed amount. (CAUTION: Possible generation-skipping transfer (GST) tax in this example — check with your estate planner if this might apply.)

It is also possible to make a qualified disclaimer of only part of an inheritance. You also can direct your qualified disclaimer in a disproportionate manner — say if one son is very successful and the other is not. Or in the case of serious illness by one child that will require substantial extra funds for medical care. The possibilities are almost unlimited….

And the best advice that many people ignore for various emotional reasons — is to discuss your estate plans with your family! You can avoid hurt feelings, disagreements and possibly avert challenges to your will. “Fair” does not necessarily mean, “equal.” Your family should understand your motives and this is best done face to face while you are here. This is very important….

(Most of the information in this section has also been provided by the law firm of Valensi Rose PLC, Century City, Los Angeles, CA.)

Conclusion

This entire article should be read and understood as brief summaries of the various topics discussed. You must consult with your own tax advisor for complete information.