Where should an individual taxpayer deduct income tax preparation fees? The obvious answer 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? Fortunately, the reply is no.
Deducting income tax planning fees on Plan A will give you little or no benefit for the majority of taxpayers since the complete miscellaneous write offs should surpass two percent of the taxpayer’s modified gross earnings to provide any benefit. In addition, the taxpayer’s complete itemized deductions should generally surpass the conventional deduction amount to provide any tax advantage.
The IRS determined in Rev. Rul. 92-29 that taxpayers may deduct income tax preparation fees related to a company, a farm, or rental and royalty earnings around the schedules in which the taxpayer reports this kind of earnings.
A taxpayer who may be self-employed might subtract the portion of the income tax preparation charges linked to the company, including schedules like depreciation schedules, on Schedule C of Type 1040 being a company cost. The tax preparation fees deducted on Routine C save the tax payer tax and personal-employment income tax.
A tax payer that is self-employed being a farmer would deduct the part of the tax planning charges related to the farm on Schedule F of Form 1040. The tax planning charges deducted on Schedule F save the tax payer income tax and personal-work income tax.
A tax payer who may have rental and/or royalty income noted on Schedule E of Type 1040 would subtract the area of the tax preparation fees associated with the rental or royalty income on Schedule E. The tax planning charges subtracted on Routine E save the taxpayer income tax. Nevertheless, the income tax planning charges subtracted on Routine E usually do not save the tax payer any personal-work tax because the rental or royalty earnings noted on Routine E is not subjected to self-work tax.
A tax payer may not subtract all of the income tax planning charges on Schedules C, E, and F of Type 1040. The tax preparer should provide an announcement for the tax payer that indicates how much of the income tax planning fee was associated with the taxpayer’s business, farm, and/or rental and royalty income. The taxpayer might deduct the remainder of the tax planning fee only on Plan A.
In the event the tax preparer does not supply the tax payer having a comprehensive declaration displaying the amount of the tax planning charge was for that taxpayer’s business, farm, or rental or royalty income, the tax payer ought to ask the income tax preparer for an itemized statement. When the tax preparer is not going to produce an itemized statement, the tax payer ought to use a lpiahg allocation. If so, the tax payer ought to consider using a different tax preparer next season.
Here is an illustration. Believe that the tax payer is personal-employed and also owns rental property. The income tax preparation 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 fee, $300 was associated with the taxpayer’s company, $200 was related to the rental real estate property, and the remainng $100 was linked to other parts from the taxpayer’s taxes come back. The tax payer paid the $600 in February 2006.
Around the taxpayer’s tax come back for 2006, the tax payer may deduct the $600 tax preparation fee as follows: $300 on Schedule C, $200 on Routine E, and $100 on Schedule A as being a miscellaneous deduction.