Not unexpectedly, the Internal Revenue Service (IRS) encourages taxpayers to get a head start on their tax preparation, especially since early filers avoid the last minute rush and get their refunds sooner. The first step is to gather all pertinent records including W-2s, 1098s and 1099s. Equally important is the process of allocating expenses between business and personal use. This may include home and automobile expenses as well as expenses for Internet access and cell phones. Keeping good records makes this task much easier.

Home office deduction: requirements 

Generally, expenses related to the maintenance and repair of a personal residence may not be deducted as business expenses. However, taxpayers who work at home and use a portion of their home for business purposes may be able to take a home office deduction. If certain requirements are met, portions of the real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation may be deductible as business expenses.

In order to claim a deduction for the business use of a home, taxpayers must use part of the home either:

• Exclusively and regularly as their principal place of business,
• Exclusively and regularly as a place to meet or deal with patients, clients or customers in the normal course of their business,
• In connection with their trade or business where there is a separate structure not attached to the home,
• On a regular basis for certain storage use such as inventory or product samples,
• As rental property, or
• As a home daycare facility.

“Exclusive use” means a specific room or separately identifiable area of the home is used only for trade or business. Example: An attorney uses the den in his home to write legal briefs or prepare clients’ tax returns. The family also uses the den for recreation. The den is not used exclusively in the attorney’s profession, so a business deduction cannot be claimed for its use.

“Regular use” means the area is used regularly for trade or business. Incidental or occasional business use is not regular use.

These requirements are discussed in greater detail in IRS Publication 587, Business Use of Your Home, online at www.irs.gov/pub/irs-pdf/p587.pdf.

Business use of car 

If a car is used only for a job or business, the entire cost of operation (subject to certain limits) may be deducted as a business expense. However, if the car is used for both business and personal purposes, only the cost of its business use may be deducted.

Deductible automobile expenses may be computed using the standard mileage rate method or the actual expense method. The current standard mileage rate may be found in IRS Publication 463, Travel, Entertainment, Gift and Car Expenses, online at www.irs.gov/publications/p463/index.html. When the standard mileage rate is used, any parking fees and tolls incurred for business purposes may be added to the deduction.

To use the standard mileage rate for an owned car, it must be used in the first year the car is available for business use. Then, in later years, the taxpayer can choose to use the standard mileage rate or actual expenses. For a leased car, the taxpayer must use the standard mileage rate method for the entire lease period. Other conditions relative to depreciation and number and use of vehicles must also be met.

To use the actual expense method, a taxpayer must determine what it actually costs to operate the car for business purposes, including gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to business miles driven.

Other car expenses for parking fees and tolls attributable to business use are separately deductible, regardless if the standard mileage rate or actual expenses are used. If a taxpayer qualifies to use both methods, he or she may want to figure the deduction both ways to see which gives a larger deduction.

Residential energy efficiency credits 

Homeowners can purchase energy efficient items such as insulation or storm windows that will improve the energy efficiency of their homes and will qualify for a tax credit if certain energy efficiency requirements are met. These items must be placed in service after Dec. 31, 2005 and before Jan. 1, 2008.

The law provides a ten percent (10 %) credit for buying qualified energy efficiency improvements. To qualify, a component must meet or exceed the criteria established by the 2000 International Energy Conservation Code and must be installed in the taxpayer’s main home within the United States.

The following items are eligible:

• Insulation systems that reduce heat loss/gain
• Exterior windows (including skylights)
• Exterior doors
• Metal roofs (meeting applicable Energy Star requirements).

In addition, the law provides a credit for costs relating to other residential energy efficiency expenses. The following credits are available:

• $50 for each advanced main air circulating fan
• $150 for each qualified natural gas, propane, or oil furnace or hot water boiler
• $300 for each item of qualified energy efficient property.

The maximum credit for all taxable years is $500 and no more than $200 of the credit can be attributable to expenses for windows.

A credit is also available for qualified solar panels, solar water heating equipment, or a fuel cell power plant added to a home. Taxpayers are allowed one credit equal to 30 percent of the qualified investment in a solar panel up to a maximum credit of $2,000, and another equivalent credit for investing in a solar water heating system, but no part of either system can be used to heat a pool or hot tub. Additionally, taxpayers are also allowed a 30 percent tax credit for the purchase of qualified fuel cell power plants. The credit may not exceed $500 for each .5 kilowatt of capacity.

For more information, see Form 5695 Residential Energy Credits (2006) (with instructions) online at www.irs.gov/pub/irs-pdf/f5695.pdf.

When It’s Tax Return Time 

Get the right forms: They’re available around the clock on the IRS website.

Take your time: Don’t forget to leave room for a coffee break when filling out your tax return as rushing can mean making a mistake.

Double-check your math and verify all Social Security numbers: These are among the most common errors found on tax returns. Taking care will reduce your chance of hearing from the IRS and speed up your refund.

Get the fastest refund: When you file early, you receive your refund faster. When you choose direct deposit, you receive your refund sooner than waiting for a check.

Don’t panic: If you have a problem or a question, remember the IRS is there to help. Try the IRS website or call the IRS customer service number at (800) 829-1040.

• Where’s My Refund? Once taxpayers file their tax return, they can track their refund through the online tool “Where’s My Refund?” at www.irs.gov/refunds. Access this secure website to find out if the IRS has processed the tax return and sent the refund. Taxpayers need some of the exact information from their tax return in order to use the tool.