RVing full-time does not exempt you from the tax season. In fact, hitting the road permanently may result in unique tax situations that require proper understanding based on IRS guidelines. Eligibility of travel expenses and the cost of your rig as deductions are two common concerns of full-time RVers. As an RV owner, it is your responsibility to know these things. Doing so will help you deal with your tax computation with a little ease.
Permanent home RVs have loan interests tied to the RV, sales tax upon purchase, and installed solar energy systems tax credit deductibles. RVs holding a business, only needs to add business-related expenses to the list of deductions. State and local taxes vary so make sure to consider the differences.
Knowledge of the tax implications in choosing a domicile is crucial to full-timers like us. This article will talk about the different tax deductions that you should be aware of when living on the road. It will also discuss the basic tax deductions you should know, and suggestions for tax savings that you can use.
Domicile And Your Tax Deductions
Establishing your state of domicile is vital when hitting the road full-time. The tax deductions you can take advantage of will depend substantially on your domicile. Domicile is the place where you intend to return after a period of absence and is your address for tax filing purposes. This means that no matter where you’re at, your domicile will determine the kinds of taxes you might be paying sooner or later.
Whatever tax regulations imposed in your state of domicile should not be taken too lightly. You eventually follow these rules come to the tax deadlines. It is necessary to be familiar with these rules in establishing your domicile. States without income taxes are popular as full-time RVers’ domicile. Florida, South Dakota, and Texas are the top three choices of full-timers because they do not collect personal income taxes.
In reality, tax laws are different in every state. You can still be liable for taxes in other states when camp hosting, workamping, or physically working outside your domicile. That is why a good background in tax rules in the different states you are traveling to will be indispensable in minimizing your tax liability.
Basis And Types Of RV Tax Deductions
Being a nomad is no different from life back in your stick-and-brick home when talking about taxes. The succeeding discussions will help you get acquainted with the different RV tax deductions that find their way into the usual computation.
RV As Your Home On the Road
The cost of RV purchase can not be deducted for tax purposes. Relevant expenses, however, are allowed by the IRS to be deducted upon meeting certain criteria should you treat your vehicle as your primary home. It is important for the full-time RVers to know this since they will consider their RV as a home.
Your motorhome must be a livable place, with sleeping, cooking, and bathroom facilities, to qualify as either a main or second home. Full-time RVers can claim their RV as their main home given the permanent road life. Your RV must pass a safety inspection though. Remember that taxes can be deducted for only two homes – main and second homes, so maintain one or two locations to make sure expenses that qualify as deductions can be applied when computing for taxes.
Tax Deduction 1: Interest On Loans
Interest is deductible only under a home mortgage loan, which means your loan is explicitly tied to your RV and in case of default in payments, the lending bank may repossess your rig. Interest under personal loans is non-deductible – no collateral is required, hence, they come with higher interest rates. The key here is a loan where your RV or home becomes your collateral.
Deductible interest has a limit set by regulations. A qualified residence loan is up to $750,000 only, which is for the principal amount. If you maintain two home locations both with mortgage loans, the total principal for deduction should not exceed $750,000. If each home mortgage loan exceeds $750,000 and you’re RVing full-time, it’s better to maintain only your RV home to avoid huge principal amounts that won’t qualify as deductions.
For a married taxpayer with separate filing, the deduction is equivalent to $375,000. Prior to 2018, the maximum allowed amount for loans is $1 million and for a married taxpayer as a separate filer is $500,000. Towing or towed vehicles are exempted from this classification so be careful not to include interests pertaining to them.
Tax Deduction 2: Sales Tax During Purchase
The sales tax upon purchase of your RV is deductible in your tax computation. This deduction applies even if your RV was purchased for cash. The sales tax deduction is done only once in your tax returns.
There are five states that do not assess sales tax and they are Alaska, Montana, Oregon, Delaware, and New Hampshire. If you purchase from these locations, you won’t pay sales tax, hence, you have nothing to deduct from your computation. There is also a prevailing limit of $10,000 for state and sales taxes that you can deduct.
Tax Deduction 3: Solar Panel Installation
As part of your 1040 as a non-refundable credit, the cost of solar panel installation can lower your taxes. It can also be carried forward if you don’t have enough or a zero tax liability. The only requirement to avail of this deduction is owning a residential or commercial solar energy system, so if you have one in your rig, you are indeed lucky!
Under the federal solar investment tax credit (ITC), you are allowed to deduct 26% of the solar installation cost from your taxes in the tax year 2020. This used to be 30% in 2019. In 2021, the deduction will go down to 22% and for 2022 and onwards, this becomes 10% and is applicable to commercial solar energy systems only. Installing a solar panel before tax year 2022 will be really handy for you.
Here’s a glance of the ITC over the years.
Tax Deduction 4: Portion Of Registration Fees
States that do not impose personal property taxes have annual vehicle registration fees. A portion of the said fees is assessed based on vehicle weight and another based on rig value. That portion based on your rig value is considered a tax-deductible expense.
RV As Business Location: When You Are A Business Owner
Using your RV as a strict business location is another story. The items enumerated above can still apply for deductions under an RV business setup, with additional expenses incurred for business operations. Home office deduction is not allowed as your RV must be 100% dedicated to your business and not for other purposes in order to qualify.
A tax home is a place where you work, not where you live. The IRS enumerates the factors in identifying your tax home, especially if you don’t have a main or regular place of work or business. Two out of these three factors must be proven by facts and circumstances for you to legally deduct travel expenses. It pays to understand these factors so you’ll be consistently guided and prevent the IRS from disallowing your claimed travel deductions.
The most common identifying factor is when a taxpayer does some work in the vicinity of his or her main home and lodges in that home while doing business there. This is the normal setup for almost all full-time RVers and won’t be hard to satisfy.
The next factor is the incurrence of duplicate living expenses when you’re on business trips. For example, you need to fly somewhere to meet your client or attend a conference for work. You left your RV parked at a campground prior to your departure and stayed at a hotel during the duration of your meeting or work conference. You actually duplicate your living expenses by staying in a hotel.
The last factor is when a taxpayer has not abandoned the area where the historical place of lodging and main residence is located. By this, family members still reside in the said place or you frequently use the main home for lodging. For instance, consider your RV as your main home. When you went away from your RV for a business trip, you did not abandon your main home because you intend to return to it after your trip and resume traveling. You also use your main home often for lodging.
You need to satisfy two out of these three criteria so you can properly include all travel-related expenses in your deductions.
Renting Out Your RV: What You Should Know
Expenses related to your RV can be deducted if you rent it out for more than 14 days in a tax year. To compute how much will be your deduction, you have to prorate the RV expenses by considering how many days it was rented out versus the number of days you lived in it.
Among the expenses that can be deducted under an RV rental arrangement are RV insurance, fees for listing on a rental site, property taxes on your vehicle, and repairs directly related to the rental, like when a renter breaks something you paid for in order to be fixed.
Tax Deduction: Business Expenses
Business expenses have to be itemized in your tax returns. Your list of possible expenses mostly likely includes travel expenses, like the cost of tickets, meals, telephone and other related items.
You have the option to deduct actual RV expenses or use the standard mileage set at 58 cents per mile. The standard mileage rate can be applied given that more than 50% of your trips are for business purposes and you have no more than 30 days of staying in your RV at any time. Sample actual expenses that you can deduct are depreciation, insurance, toll, gas, oil, garage rent, parking fees, and repairs.
Tax Deduction Process For RVers
Whichever state you’d be paying for your local taxes, a general tax deduction process is followed every time. State and local taxes differ among states so it’s best to know which ones have no specific tax types. The next paragraphs will emphasize these topics.
Standard Deduction (SD)
The use of standard deduction means having a fixed amount of expenses to be deducted instead of listing them one by one. This is more of a straightforward option as you won’t care about receipts and bills anymore.
The amount of standard deduction depends on taxpayer status. Singles, heads of households and married taxpayers can avail of different standard deduction amounts. The summary is shown below.
If your itemized expenses are higher than the above figures, you can use the itemized deductions instead in computing your tax liability.
Simply put, your itemized deduction consists of the expenses you have listed one by one. Medical expenses,charitable contributions, and depreciation are part of the usual items. Sales tax, state and local taxes, as well as mortgage interest on your RV loan, are also included. Ordinary and necessary expenses in the course of trade or business are part of your itemized deductions.
Taxes In Different States
State, sales, and personal property taxes differ as you travel in various states. Vehicle registration fees also vary as those without personal property taxes on vehicles are the ones who normally impose this kind of fees. Here are lists of states and the kinds of RV taxes they do not collect.
Suggestions For Tax Savings
There are other ways to save taxes on your vehicle, aside from availing the different deductions already discussed. The following tips will save both time and money so you’re sure to lessen tax liabilities in the future.
Maintain Proper Documentation
Paperwork is the most important part of an individual’s tax life. You can’t simply claim deductions without proof because those documents are your basis for the figures presented. The IRS will look for those records, receipts and bills, so it is better to keep these electronically. Documents that are mailed to you should also be kept in storage boxes.
There is a need to separate personal from business records because personal expenses don’t get deducted. To do this, have business debit and credit cards. Classify expenses too, like taking note of those directly related to revenue and those that are not. The more documents you have, the more details you can possibly add to your deductions. Spreadsheets can do wonders in your recording for both personal and business accounts.
It is also advisable to maintain travel logs when on trips. You ought to record details such as dates, reasons of travels, amount of expenses and locations because not all of your travel expenditures may qualify as valid deductions. Having a complete record will help you deal with taxes with more confidence. Use of a smartphone for digital copies of your receipts further helps avoid stacks of paper in your RV and save storage for other things.
Use Of Accounting Software: Makes Life Easier
The use of software keeps you on track of expenses and facilitates a more convenient recording process compared to manual recording. Delays in recording can mean penalties that is why you’re better off with an app or software use. Computation and filing of tax is easier too, whether you do it on your own or pay someone else for the dirty work.
Open A Health Savings Account (HSA)
Contributions to an HSA can potentially reduce your income for taxation purposes and help plan your future medical costs. With an HSA, you are actually hitting two birds with one stone. There is a limit though, depending on taxpayer status.
Singles can contribute up to $3,500 while couples and families can pay as much as $7,000. For those aged 55 and older, adding an extra $1,000 is allowed. A high-deductible health plan is needed for this strategy, one with lower premiums and higher deductibles in order to encourage a consumer-driven healthcare package.
Dilemma is a sure thing when tax deadlines are just around the corner, but you do have available options to mitigate possible risks. Knowing your full-time RV tax deductions and which ones apply to your current situation can empower you and in turn, lighten the burden of IRS compliance. In the meantime, jot down the deductions you see as applicable. Your list will guide you in managing taxes ahead. You’ll never know how much time and money it will save you when due dates come.