Off to Two Mines

March/April 1985

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Tax Credit for Bicycle Commuting

You can receive a tax credit if you commute to work by bicycle.

When you work for two employers and receive two W-2's, tax form preparation isn't substantially different from the (ahem) simple case we just finished looking at. But there are some considerations that may lessen the tax you pay.

First of all, if you worked for two employers who paid you a total of more than $37,800 in 1984, there's a good chance that excess social security (FICA) was withheld from your pay. Check to see that no more than a total of $2,532.60 was withheld; just add up the amounts on the line marked FICA on your W-2's. The excess may be taken as a credit on line 61, Form 1040.

Commuting to your second job (or second job location with the same employer) from the first job is a deductible expense on Form 2106—for itemizers and nonitemizers alike. This deduction has been complicated somewhat, however, by specific IRS rulings. For example, the service judges that the principal place of business for a doctor is both his or her office and the hospital. Hence travel between isn't deductible. In addition, traveling from a union hall to a job site isn't deductible.

If you have two jobs in different cities or general areas, the question becomes, What is your principal place of business? The entire city or general area of your principal place of business is called your tax home (as opposed to your residence) by the IRS, and the location of this base can have profound effects on your taxes. For example, if you work in two places that are so far apart that you have to spend some nights sleeping at each location, you may be able to deduct living expenses at the location that is not your tax home. The location of your tax home is determined by comparing (a) the amount of time spent working in each area, to (b) the degree of your business activity in each area, to (c) the amount of income you earn in each area.

This could lead to a situation where your residence is not your tax home. If, for example, your main employment is in a distant city, that's your tax home even though you travel to your residence each weekend to be with your family. In this case, the IRS would consider your residence to be maintained for personal convenience. But (to stretch this hypothetical situation one step further) let's say you happen to have minor employment in the area of your residence. Now you can deduct both your travel expenses from your tax home to your residence area and also your living expenses while there—including your part of the costs of maintaining the household. Thus a portion of your home and expenses while there become deductible. On the other hand, you may not deduct any living expenses for being in the area of your tax home.

Another peculiar situation for a tax home occurs when a worker is on the road constantly. The IRS agent may consider that such a person has no tax home and therefore can't deduct expenses for business travel away from home. There are three main criteria for establishing a tax home in this case: (a) Some work is done in the vicinity of the person's residence. (b) Rent is paid on the residence even when the person is on the road. (c) The residence is in an area where the person was raised or has lived for some time, or a family member lives in the area.

If you and your spouse work in different locations, bear in mind that you may have different tax homes, even if you file a joint return.

What if you're assigned a temporary position by your employer at a distant location? In order to maintain that your original tax home continues as your tax home, therefore making your travel and living expenses while on assignment deductible, you'll have to prove that the assignment was for a known limited length of time (less than one year in one recent tax case), and that you've maintained your original residence. Having a family at the original residence (and tax home) is an important criterion.

You'll save enough for property in the country sooner not only by holding two jobs to bring in more income but also by paying close attention to taxes.

Where to Get IRS Forms and Publications

For free IRS materials, write to your area Forms Distribution Center. If you don't know what you want, ask for Publication 910, "Taxpayer's Guide to IRS Information, Assistance, and Publications. "

NORTHEAST (Connecticut, Maine, Massachusetts, New Hampshire, Eastern New York, Rhode Island, and Vermont): P.O. Box 1040, Methuen, MA 01844.

WESTERN NEW YORK: P.O. Box 260, Buffalo, NY 14201.

MIDATLANTIC (Delaware, District of Columbia, Maryland, New Jersey, Pennsylvania, and Virginia): P.O. Box 25866, Richmond, VA 23260.

SOUTHEAST (Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, and Tennessee): Caller No. 848, Atlanta, GA 30370.

MIDWEST (Indiana, Kentucky, Michigan, Ohio, and West Virginia): P.O. Box 6900, Florence, KY 41042.

NORTH CENTRAL (Illinois, Iowa, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, and Wisconsin): P.O. Box 24711, 1500 E. Bannister Rd., Kansas City, MO 64131.

SOUTH CENTRAL (Arkansas, Colorado, Kansas, Louisiana, New Mexico, Oklahoma, Texas, and Wyoming): P.O. Box 2924, Austin, TX 78769.

WEST (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Utah, and Washington): P.O. Box 12626, Fresno, CA 93778.

A Glossary to Tax Terms

Accelerated cost recovery system (ACRS): A method of depreciation for 3-, 5-, 10, and 18-year property wherein the full percentage is allowed in the first year (no matter when during the year the property was purchased), varying percentages are allowed (as specified in the instructions for Form 4562) in subsequent years, and no percentage is allowed in the last year. Each year's percentage is set by the IRS.

Accrual accounting: An accounting system wherein income and expenses are listed at the time of service, not of payment. Under accrual, you count income you've earned but not yet received and expenses you've incurred but not yet paid bills for. You can't switch methods of accounting without permission from the IRS.

Adjusted gross income: The amount of your total income that remains after adjustments—such as moving expenses, employee business expenses, IRA or Keogh payments, penalties for early savings withdrawals, alimony paid, deductions for married couples with both working, and disability income exclusion—are subtracted. This amount must be reported on line 33 of Form 1040 and precedes either itemized deductions or the standard exclusion.

Allocation: A process wherein an expense is divided between two situations. One part may be deductible while the other isn't. For example, a portion of the total cost of driving your personal automobile may be deductible as a business expense: The total cost of driving the car is allocated.

Amortization: A process similar to depreciation wherein income (such as bonds bought at discount) or expense (such as business startup costs) is spread over several tax years.

Basis: The cost from which profit is figured on the sale of property. Basis in a house, for example, is the amount originally paid plus capital improvements-minus depreciation allowed or taken.

Capital gain and loss: The profit or loss from property held for investment is figured by capital gain. Gains or losses from property held less than six months are considered short-term and are fully taxable or deductible (from other gains). Property sold after more than six months is long-term, and gain or loss is reduced to 40% of the amount.

Credit: Tax credits are deducted from the amount of tax paid, not from income. They are taken on lines 41 through 50 of Form 1040.

Deductions: Expenses declared on Schedule A by individual taxpayers and Schedule C by the self-employed. These may involve certain personal or employee-related costs. The alternative to itemizing deductions is the standard deduction (called the zero bracket amount).

Depreciation: A process by which a portion of the value of property that will wear out, lose value, or become obsolete may be deducted during each year of its life. Accelerated cost recovery is a method of depreciation.

Earned income: Money earned by gainful employment-as opposed to dividends, interest, or capital gains.

Exclusion: Certain types or portions of income may not be taxable. Exclusions are sometimes the same as adjustments.

Exemption: A consideration of the number of people dependent upon a taxpayer, including the taxpayer.

First-year expensing: Up to $5,000 of the cost of certain property bought for business use may be deducted in the year purchased. Depreciation and investment tax credit are alternatives.

Fiscal year: A 12-month accounting period different from the calendar year. Taxes need not be filed on the calendar year. A change of fiscal year must be approved by the IRS.

Gross income: Total income before any adjustments or deductions are subtracted.

Imputed interest: On certain transactions where no (or low) interest was charged (such as zero interest loans to family members), the IRS will calculate interest at the imputed rate, which is determined daily by the service itself.

Investment credit: 10% of the cost of business property that will last five years or more may be deducted in the year the equipment is purchased. Business property that is figured to last three years (cars, for example) entitles the purchaser to a credit equal to 6% of the cost.

Recapture: If property that is being or has been depreciated is sold for more than the basis in that property (cost, plus capital improvements, minus depreciation), the portion of the difference equal to the depreciation deduction must be reported as ordinary income. Thus the depreciation is recaptured. See special rules for recapture of first-year expensing if property is held less than two years and for investment tax credit if property is held less than five years.

Straight-line election: Property may be depreciated by claiming an equal percentage of its cost in each year of its life. For example, five-year property would be claimed at a rate of 20% each year, assuming that the property was put into service on January 1 of the first year of depreciation.

Zero bracket amount: The name the IRS uses for its alternative to itemizing deductions. (This formerly was called the standard deduction.) If you do not itemize, this amount is figured into the tax table you use. If you do itemize, the zero bracket amount must be subtracted from your total itemized deductions on Schedule A.

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