Where should an individual tax payer deduct income tax preparation fees? The obvious solution could be on Schedule A of Form 1040 as a miscellaneous deduction. Are income tax planning fees deductible only on Plan A for many taxpayers? Thankfully, the correct answer is no.
Subtracting income tax planning fees on Plan A can provide virtually no benefit for many taxpayers because the total miscellaneous deductions should exceed two % of the taxpayer’s modified gross earnings to offer any benefit. Additionally, the taxpayer’s total itemized deductions must generally surpass the standard deduction amount to offer any tax benefit.
The Internal Revenue Service ruled in Rev. Rul. 92-29 that taxpayers may deduct income tax preparation charges associated with a company, a farm, or rental and royalty earnings in the agendas where the taxpayer reviews such income.
A tax payer who may be self-employed might subtract the part of the income tax preparation fees related to the business, such as schedules like devaluation agendas, on Schedule C of Type 1040 as being a company expense. The tax preparation fees deducted on Routine C save the taxpayer income tax and personal-employment income tax.
A tax payer who is personal-employed being a farmer would subtract the portion of the income tax planning fees linked to the farm on Routine F of Type 1040. The income tax planning charges deducted on Routine F conserve the tax payer tax and personal-work tax.
A tax payer that has rental and royalty earnings reported on Routine E of Type 1040 would subtract the area of the tax planning fees linked to the rental and/or royalty income on Routine E. The tax planning charges deducted on Schedule E save the taxpayer tax. Nevertheless, the income tax preparation charges subtracted on Schedule E do not save the tax payer any personal-employment income tax as the rental or royalty earnings noted on Routine E will not be subjected to personal-work income tax.
A tax payer may not subtract all of the tax preparation fees on Agendas C, E, and F of Type 1040. The tax preparer should provide a statement to the taxpayer that suggests how much of the income tax preparation fee was linked to the taxpayer’s business, farm, and rental or royalty earnings. The taxpayer may deduct the remainder of the tax planning fee only on Plan A.
In the event the tax preparer fails to supply the taxpayer with a comprehensive declaration showing how much of the tax preparation charge was for that taxpayer’s company, farm, and/or rental and/or royalty earnings, the tax payer ought to request the tax preparer to have an itemized statement. When the income tax preparer is not going to produce an itemized declaration, the tax payer ought to utilize a lpiahg allocation. If so, the taxpayer should seriously consider utilizing a different income tax preparer next year.
The following is an example. Believe that the tax payer is personal-employed and also owns rental real estate. The tax planning charge for your taxpayer’s Form 1040 and related schedules for 2005 was $600. The income tax preparer claims that relating to the $600 complete charge, $300 was associated with the taxpayer’s business, $200 was linked to the rental real estate property, as well as the remainng $100 was linked to other areas from the taxpayer’s tax return. The tax payer compensated the $600 in Feb . 2006.
In the taxpayer’s tax return for 2006, the taxpayer might deduct the $600 tax planning fee the following: $300 on Routine C, $200 on Schedule E, and $100 on Plan A as being a miscellaneous deduction.