Exactly where ought to an individual taxpayer deduct tax preparation charges? The apparent answer may be on Schedule A of Form 1040 as a miscellaneous deduction. Are tax preparation costs deductible only on Schedule A for all taxpayers? Thankfully, the answer is no.
Deducting tax preparation fees on Schedule A will give little or no advantage for most taxpayers due to the fact the total miscellaneous deductions must exceed two % of the taxpayer’s adjusted gross revenue to provide any advantage. In Offer in Compromise , the taxpayer’s total itemized deductions will have to commonly exceed the typical deduction quantity to provide any tax benefit.
The IRS ruled in Rev. Rul. 92-29 that taxpayers may perhaps deduct tax preparation costs related to a organization, a farm, or rental and royalty revenue on the schedules where the taxpayer reports such revenue.
A taxpayer who is self-employed may possibly deduct the portion of the tax preparation fees related to the company, including schedules such as depreciation schedules, on Schedule C of Type 1040 as a business expense. The tax preparation charges deducted on Schedule C save the taxpayer revenue tax and self-employment tax.
A taxpayer who is self-employed as a farmer would deduct the portion of the tax preparation charges related to the farm on Schedule F of Type 1040. The tax preparation costs deducted on Schedule F save the taxpayer revenue tax and self-employment tax.
A taxpayer who has rental and/or royalty income reported on Schedule E of Form 1040 would deduct the portion of the tax preparation charges related to the rental and/or royalty revenue on Schedule E. The tax preparation charges deducted on Schedule E save the taxpayer revenue tax. On the other hand, the tax preparation costs deducted on Schedule E do not save the taxpayer any self-employment tax due to the fact the rental and/or royalty earnings reported on Schedule E is not topic to self-employment tax.
A taxpayer may perhaps not deduct all of the tax preparation costs on Schedules C, E, and F of Kind 1040. The tax preparer need to give a statement to the taxpayer that indicates how substantially of the tax preparation fee was related to the taxpayer’s enterprise, farm, and/or rental and/or royalty earnings. The taxpayer may possibly deduct the remainder of the tax preparation fee only on Schedule A.
If the tax preparer does not supply the taxpayer with a detailed statement showing how substantially of the tax preparation charge was for the taxpayer’s company, farm, and/or rental and/or royalty earnings, the taxpayer shoud ask the tax preparer for an itemized statement. If the tax preparer will not provide an itemized statement, the taxpayer need to use a affordable allocation. In that case, the taxpayer need to seriously take into consideration employing a different tax preparer subsequent year.
Right here is an example. Assume that the taxpayer is self-employed and also owns rental genuine estate. The tax preparation charge for the taxpayer’s Type 1040 and associated schedules for 2005 was $600. The tax preparer states that of the $600 total fee, $300 was related to the taxpayer’s organization, $200 was associated to the rental genuine estate, and the remainng $100 was related to other components of the taxpayer’s revenue tax return. The taxpayer paid the $600 in February 2006.
On the taxpayer’s revenue tax return for 2006, the taxpayer may well deduct the $600 tax preparation charge as follows: $300 on Schedule C, $200 on Schedule E, and $100 on Schedule A as a miscellaneous deduction.