Tips from the experts for motorhomers looking to save money the next time they file their taxes.
By Janet Groene, F47246
State and federal tax rules change so quickly, even professionals have trouble keeping up. Now more than ever, it’s important to keep taxes in mind all year, not just at income tax time. Here’s just one example.
Nationally known tax expert Julian Block called to remind me that the sales tax deduction for new cars also applies to new motorhomes. At the same time, a motorized RV doesn’t qualify for the first-time home buyer credit, according to Long Island certified public accountant Christopher G. Farrell of Goldstein & Company. (A travel trailer or fifth-wheel is personal property, not a vehicle, but a park model or mobile home that is affixed to land does qualify.)
Confused? Try this. An RV owner who uses a motorhome for charity work while away from his or her stationary home can deduct meals, but full-timers cannot take the same deduction, because they are always “at home.” But both can deduct mileage for charitable projects. To navigate this briar patch, it’s essential to see your own tax adviser.
Taxes are higher than ever, tax codes are complicated, and no relief seems to be in sight. Here are some tidbits and tips from tax experts around the United States. It’s crucial, however, to take your questions to your personal tax adviser, one who can tailor advice to your individual situation, goals, and “home” state.
Kevin Bock is president of Integrity Estate Advisors and Veterans Benefit Advisors, based in the Pittsburgh, Pennsylvania, area. About taxes, he said, “I believe that if there is something you love to do, do it as a business.” He’s found that when the business is set up correctly, RVers can deduct most if not all of their travel expenses. “No matter what your age, if you are willing to try honestly to make a profit, there are tax deductions waiting for you,” he said.
Regarding sales tax, Mr. Farrell said, “Sales tax paid on an RV is potentially an itemized deduction, [but] taxpayers have the option to deduct either sales tax or state income tax paid, not both.” This is not a problem, of course, for full-timers whose home base is a state that has no state income tax. (See below. The sales tax deduction applied to vehicles purchased in 2009, and at press time it wasn’t clear whether the deduction would be extended for 2010.)
Ryan S. Himmel is founder of BIDaWIZ (http://www.bidawiz.com/), where consumers and small-business owners can get accounting and financial advice online from licensed professionals such as CPAs and certified financial planners. Take the video tour at the Web site to see how this service works.
Mr. Himmel said, “Regardless of where you are physically located, you have to declare income for federal tax purposes. However, you only have to file taxes in a state if you physically earn the income in a state. For example, if you take a job in a state, and are paid wages, those wages are taxable in that state and state taxes are withheld for that state. This is why in a W-2, the state designation is listed in the bottom left-hand corner of the form.” You also may get a state income tax bill for interest paid if you opened a bank account or had other financial transactions in that state.
Full-timers spend a lot of time and thought in choosing a “home” state, but that doesn’t always get you off the hook, tax-wise. Josh Nowack of Nowack Strategic Business Advisory & CPA in Irvine, California, commented, “While the IRS or state tax authorities may want to take a closer look at your tax return to verify the information, a primary residence is more defined by facts and circumstances than a checklist. It’s about where we spend our time. Clearly, in order to be a residence, the RV would need to have the requisite functions [such as a sink and a toilet], but other than that, it’s rather flexible.”
As for state income taxes, he said, “The state would look at where you spend your time, where do you bank, where are your friends, doctors, etc. For example, it would be very advantageous to claim Nevada for a principal residence instead of California. However, if you’re spending all your time in California, [and] your doctors, bank, friends, and family are all here, then California will try [and likely succeed] in taxing your income.”
Did you buy a new ride in 2009? According to Bob Meighan, vice president of TurboTax, here is the story about deducting state sales tax if you bought a new motorhome between February 16, 2009, and January 1, 2010 (this deduction may be extended through 2010). “Buyers of new vehicles can deduct the sales tax paid on the purchase, even if they don’t claim sales taxes as itemized deductions. They can add the tax they pay to their standard deduction.” Sales tax paid on the first $49,500 of cost qualifies. The benefit begins phasing out for married couples with modified adjusted gross incomes (MAGI) over $250,000 and singles with MAGI over $125,000, and is completely gone for single filers with MAGI of $135,000 or more and joint filers with AGI of at least $260,000.
You can have a personal tax adviser anywhere you travel by using the Internet. Go to http://www.keen.com/ and enter “tax adviser” in the window. You can enter “Julian Block” as the expert you want to consult. An appointment is made and the two of you consult privately by phone. The cost is $2.95 per minute.
Installing energy-efficient home improvements such as windows and doors in your residence (including your motorhome) will qualify you for a tax credit, according to Mr. Block. The credit equals 30 percent of the cost, capped at a maximum of $1,500. There’s another credit of 30 percent of the cost of installing renewable-energy improvements such as solar water heaters and solar panels. This credit isn’t capped, and it doesn’t apply to just your principal residence. For detailed information on the laundry list of items that qualify for the two credits, Mr. Block directs taxpayers to www.energytaxincentives.org.
In explaining the difference between credits and deductions, Mr. Block noted that credits lower taxes dollar for dollar while deductions merely reduce the amount of income on which taxes are figured. “The distinction is critical,” he said. “A deduction of $1,000 saves $350 in taxes for someone in the highest bracket of 35 percent, but only $100 for someone in the lowest bracket of 10 percent. A credit of $1,000 reduces taxes by that amount, whatever your bracket.”
Another difference, he noted, is that credits can be nonrefundable or refundable. “Nonrefundable means credits cannot be refunded to the extent that they exceed your income tax. Put another way, credits like the one for child care provide no help after your income tax becomes zero. Refundable means credits like the recently revised one for first-time home buyers can be refunded to the extent that they exceed your income tax. So, even buyers who have no income-tax liability could receive as much as $8,000 from the IRS.”
Sheila Clark of Peoples Income Tax Inc. reminded RVers that the second-home deduction still applies, too. “To qualify as a home or second home, the RV must have all of the following: sleeping facilities, cooking facilities, and toilet facilities. If the taxpayer is using the RV as a primary home, he is eligible to deduct points paid, mortgage insurance premiums, mortgage interest, and real estate taxes on Schedule A.” See your own tax adviser about what qualifies as what Ms. Clark calls “real estate” taxes.
What about state income taxes? Richard Coppa, a certified financial planner at Wealth Health LLC in Roseland, New Jersey, added, “Not only should one focus on income taxes, but it is important to recognize the types of income one receives. Many states have an income tax but provide exemptions for such things as government pensions, Social Security, or even private pensions and retirement plan distributions.”