distinctively military items such as ceremonial swords. Reservists’ uni- forms are deductible if they can only be worn while performing duties as a reservist. And, sorry, if you’re transition-
Employee expenses For those on active duty and a few
about to make the transition to the civilian world, a lot of mispercep- tions involve Schedule A — and the most common area is unreimbursed employee expenses.
Uniforms.More than one ser- vicemember has assumed that be- cause uniforms are required by the military, they are an unreimbursed employee expense. Sorry, it just ain’t so. The IRS says a uniform (cost and maintenance) is deductible if 1. the employee is required to wear the clothes as a condition of employment and 2. the clothes are not suitable for everyday wear. You might think your uniforms qualify, but according to the IRS, most of your uniforms are suitable for everyday wear. The IRS specifi cally addresses military uniforms and says active duty servicemembers can only de- duct battle dress uniforms and util- ity uniforms and insignia or other
ing from the military to the civilian world, you can’t deduct new suits, dress shoes, or cuffl inks either. Gym memberships. Ever heard this one? “I have to pass a PT test, so working out at the gym is a required employee expense and I can deduct the fees at the Pentagon Athletic Center.” It just ain’t so. The IRS is very specifi c here. It states, “You can- not deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition.” Home office. You would think
if you work from a home offi ce (for the military or for your civilian employer), the expense defi nitely would be an employee expense. Beg- ging the forgiveness of Billings, this one might be so, but you must meet several requirements before you can deduct a home offi ce. The major ones are 1. you must regularly use part of your home exclusively for conduct- ing business, 2. you must show you use the offi ce as your principal place of business, and 3. the business use of your home must be for the conve- nience of your employer (it must be a business necessity).
Tax laws are complicated. Be very careful if you decide to act on something you heard or your tax software insinuates. Don’t fall for something you “know for sure that just ain’t so.”
50 MILITARY OFFICER FEBRUARY 2015
Sale of a primary
residence Another area wrought with misper- ceptions is the sale of a house that has been a primary residence and a rental property. Home sale tax exclusion. If
you’ve been in the military for a while, there is a pretty good chance this one applies to you. Most people think if you’ve lived in your house for two out of the past five years (po- tentially up to 15 years if you moved out as a result of military orders), you don’t have to pay taxes on the capital gains from your home. This one is just partially so. There are two parts of the sale.
The first part applies to the difference between the purchase price and sales price (after expenses). This capital gain can be excluded under Section 121 of the code. (If you have “non- qualified use,” a portion of the sale may still be taxable.) But there is more. When you rented out the house, you should have depreciated it. The difference between the depreciat- ed value and the original value of the home is subject to taxation under Section 1250 of the code. Now you might have received advice to not de- preciate the property to avoid taxes on the 1250 gains. This definitely ain’t so. The IRS says you must pay taxes on the depreciation you took or should have taken. If you are subject to taxes on 1250 gains, the maximum rate is 25 percent. Another thing to consider is those 1250 gains might mean you owe taxes even if you sell the house for less than you paid for it.
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