Writing Off Your Summer: Preparing For Next Tax Season

We’ll admit it: few of us are thinking about tax season in August. With beach season in full swing, it’s one of the least appealing things to focus on. Yet spending a few minutes on next year’s taxes might pay off in a big way. There are actually a number of summertime tax deductions you can take advantage of as long as you know what they are and how to claim them. Today, let’s put down the sunscreen and examine six ways to write off your summer.

Summer Vacations

Could it be true? Is it really possible to write-off the cost of a summer vacation? The answer: it depends. TurboTax wrote an extensive post on this very subject last June, which states:

Uncle Sam loves money. Uncle Sam loves money so much that he’s willing to give you a tax deduction to help you make even more, so he can collect a little extra in taxes. You can use this to your advantage because you can deduct any “ordinary and necessary expenses” related to the pursuit of business, including trips. The “ordinary and necessary” part is and has always been a little fuzzy because it’s different for each industry. The basic idea is that if it’s common and appropriate for your type of business, then it’s acceptable.

Key things to know: you can’t deduct your family’s expenses, but you CAN deduct your own transportation, lodging, meals & expenses directly related to the business. Expenses that are lavish (unreasonable) or extravagant or that are for personal purposes are not deductible.  If your travel requires you to be away from the general area of your tax home longer than an ordinary day’s work and you need rest to fulfill the demands of your job then the travel expenses are deductible.  Further details (including how many cents on the dollar you can deduct) are offered in the blog post. When preparing your taxes, TurboTax will guide you through entering your travel expenses.  You can also read our Job Search blog regarding deducting travel related job search expenses.

Daycare

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For kids, summertime means two months of stress-free leisure. For parents, it means suddenly needing someone to watch their kids while they work. Daycare centers are a common option, and depending on your tax situation you can deduct the costs of sending your kids there. The IRS offers some useful guidelines in its article on 10 Things To Know About the Child & Dependent Care Credit.

Important takeaways include: you must be using daycare services so that you can work or look for work. Sorry – you can’t stick your kids in daycare while you spend all day at the casino and write it off. Also, you cannot pay your spouse or a dependent to care for your child and write it off.  In addition, if your child is not 19 or older by the end of the tax year, he or she cannot be paid to care for your other child even if he or she is not a dependent. Finally, the child being cared for must be claimed as a dependent and must  live with you for more than half the year.

Summer Camp

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Summer camp may also be deducted via the Child and Dependent Care Credit.  Here are some specifics on taking the deduction:

The credit may use up to $3,000 of expenses paid in a year for one qualifying dependent, and  up to $6,000 for two or more qualifying dependents. The credit can be up to 35 percent of qualifying expenses, depending on your adjusted gross income.

Children must be under age 13 at the time they went to summer camp or received any qualifying care. The camp may provide a specialized activity, like soccer, chess or computer training-so you can toss in some focus along with the care.

Finally, this credit applies not just for children, but also for the cost of care for adults who are elderly or disabled.

One unfortunate catch: you actually cannot use this deduction for overnight camps, only day camps.  To find out more about the tax benefits of keeping your little one(s) busy in daycare while you’re busy at work, read our “How to get a Break for Summer Childcare” blog.

Green Cooling Appliances

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Not all summertime tax deductions relate to vacationing. You can also install energy-efficient cooling appliances, for instance. A quick glance at Energy Star’s website provides helpful guidance on which appliances qualify for deductions in the form of  the Residential Energy Tax Credit, how much those deductions are, and other key information for making a smart purchase.

For example: a new central air conditioning system (that meets Energy Star specifications) can net you a $300 tax credit just for installing it. This is ideal for people who intended to install central air without knowing about the tax credit, because it provides a deduction for something they were already going to do. So, if you’ve been on the fence about going green until now, this might be the nudge you need to take the plunge.  For more information on the tax credit check out our Residential Energy Tax Credit 2011 blog.

Parties For Co-Workers

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Summer offers the perfect opportunity to throw company picnics, barbecues, or pool parties. Not only do they contribute to a relaxed work atmosphere, they also provide a potential tax deduction for the business. As Inc. Magazine explains, “half of all costs related to food, facility rental, decorations, and entertainment are tax-deductible”.   You may even hold the party at home as long as the entertainment expenses are both ordinary and necessary and meet the directly related and associated test!  Please take note : there are specifics regarding which type of rental facilities can and cannot be deducted.  Check IRS Publication 463 for more details.

That being said: it’s still a good idea to keep firm records of all who attended the gathering, just in case the IRS audits your business and demands proof that it was a work event.  Your records must prove business purpose, the amount of each expense, the date and place of entertainment, and the business relationship of the persons entertained.

Hire Extra Seasonal Workers

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If you’re a business owner, you can lower your tax bill even further by hiring additional summertime workers. Thanks to the Work Opportunity Tax Credit (which rewards businesses for “hiring individuals from nine target groups who have consistently faced significant barriers to employment”) you may qualify for a tax credit of up to 40% of first year wages up to $6,000 per employee.  If an employee is a long-term family assistance recipient, the Work Opportunity Tax Credit is a percentage of  first and second year wages  up to  $10,000 per employee.

A special version of the Work Opportunity Tax Credit allows you to hire 16 or 17 year old youths who work for you between May 1-September 15. As long as these workers live in an “empowerment zone, enterprise community, or renewal community”, you may be able to deduct up to 40% of the first $3,000 of wages paid to them.

Didn’t make that decision to hire a potential employee who fits into the target group this summer?  You may want to make them an offer soon and increase your bottom line.  The Work Opportunity Tax Credit is slated to expire on December 31, 2011 and it is uncertain if it will be extended.

TurboTax software easily guides you  and follows IRS guidelines when you enter these tax deductions and tax credits.