TAX FILING SEASON
This time of the year can really give us heartburn. The heartburn can come from a variety of things, but two of them can come from having to accumulate all your tax filing documents and preparing your tax return. I would make the argument that accumulating the documents is worse than preparing the return. And then, the result can be unsettling for sure. No one wants to send MORE money to the IRS. Today hopefully, we can lend some thoughts to helping reduce your 2016 tax liability.
Most everyone knows that aviation professionals generally qualify to write off certain out of pocket expenses they have associated with their job. These expenses are called employee business expenses and are deducted on Schedule A of your 1040. Itemized deductions consist of medical expenses (if above the threshold), home mortgage interest, taxes (income or property), charitable contributions, etc. These deductions are added together and deducted from your total income before applying the tax rate, so it is important to maximize them.
To be eligible, employee business expenses must qualify under four tests.
- The expense must be ordinary. An ordinary expense is one that is common and accepted in your field of trade, business, or profession.
- The expense must be necessary. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be required to be necessary.
- The expense must not be personal. A personal expense is one that you would have incurred even if you weren’t employed.
- The expense can’t be prohibited in the tax code. An example of this would be a wristwatch. We can make the argument that a watch is ordinary and necessary for an airline pilot. Furthermore, we could argue that is isn’t personal because we only purchased it for airline employment. However, the tax code specifically says wristwatches are not tax deductible for any reason.
Although not a comprehensive list, common examples of expenses that are included are; union dues (and initiation fees), uniform purchases and upkeep (alterations, dry cleaning ,etc.), luggage, annual physical, passports/visas, sunglasses, connectivity (cell phone & internet), bid service, office costs, tips for van drivers, books for training, and professional publications.
A QUICK CAUTION ABOUT COMMUTING EXPENSES
Commuting expenses do not qualify as employee business expenses and are not tax-deductible. This is where the definition of “tax home” becomes very important. Tax home does not always mean where you live. Tax home is defined by the IRS in Publication 463 as follows: “Generally your tax home is your regular place of business …. regardless of where you maintain your family home. It includes the entire city or general area in which your business or work is located.” Thus, for most pilots, this would be your domicile. Typically, if your domicile changes during the year, your tax home would change with it. Tax home is often questioned for commuters, but typically the tax home will be the same as the domicile.
This concept of tax home is very important because of the allowance of the per diem deduction. The pilot taxpayer is only allowed to deduct meal and incidental expenses when away from their tax home.
The per diem deduction allowed by the IRS is typically used to offset the per diem that is paid by your airline and can result in a larger deduction for tax purposes than the reimbursement given by your employer. This specific area is where most crew members leave money on the table. These extra per diem deductions can help you save taxes and is well worth the effort and cost to make sure you get your maximum deduction for your overnights.
The per diem calculation is very difficult, and we have found that it typically is much easier to use a software program for calculating per diem. The calculation is based on the location of your overnight travel, and the amounts vary by city and typically are larger for international destinations. Using a software program, once those locations are entered, the system typically calculates the per diem deduction based on the amount allowed per IRS guidelines.
We would encourage you to invest in the time necessary to calculate this deduction to help minimize your tax liability whether you prepare your own tax return or have a professional prepare it for you.
TAX FILING UPDATE
Also, wanted to update you on the filing date for your tax return this year. The deadline for filing your 2016 Form 1040 is Tuesday, April 18th. The tax filing deadline was extended because of April 15th falling on a Saturday, and the following Monday is a holiday in the District of Columbia. Happy Emancipation Day to those folks in DC!!
Looking forward, we expect changes in the tax system and certainly tax rates for 2017. There are currently several plans under discussion, and we will be tracking the progress of tax modification and advise you as appropriate when some clarity is obtained.
Have a great month and good luck on gathering all your tax data.