Summer’s nearly here and the kids are looking forward to their freedom, or at least the first few weeks of their freedom, but then what? If your kids are typical, it won’t be long before they are complaining about being bored. You would love to go on vacation, but the truth is times are tough and it’s hard to justify spending your savings on a one-week hiatus from life. Or is it?
What if you had a rich relative who could help foot the bill? Would that make your vacation a little more affordable? While it’s debatable whether your favorite uncle, Uncle Sam, really is rich, one thing is for certain: in the right circumstances, he doesn’t mind helping you with your vacation expenses.
You probably know that business expenses are deductible against your income. But did you know that business expenses include the “ordinary and necessary” ones incurred in business travel? That means that transportation, lodging, meals and incidental costs spent on business trips reduce your taxable income and, depending on your tax bracket, could save you a bundle. The best way to illustrate this is with an example.
Let’s say you have a family of four and live in Atlanta, Ga. According to MapQuest, it’s about a 450-mile drive from there to Walt Disney World. Let’s further say that your industry has a convention at one of the Disney World Resorts each year. If you are self-employed, you can get a substantial part of your trip included in business expenses. Here’s how it would break down:
Transportation – You and your family could fly to Disney World, but that would cost about $2,000 roundtrip and the only part that would be deductible is your airfare, or $500. For that same $500 (assuming you take the standard mileage deduction for your auto), you could drive to Disney World and back. Even better, the full amount would be deductible, since you’re really not paying any more than if you went by yourself. You would also have a vehicle while you’re at Disney.
Lodging – Unless you plan to commute from Atlanta to Orlando each day, you will require a room. As luck would have it, the conference is large enough that the Grand Floridian is offering a cut rate of $400 per night, regardless of whether you stay by yourself or have the whole family. Since you will be in Florida for five nights, your lodging bill will be another $2,250 (assuming occupancy taxes of 12.5 percent). Because there is no additional cost for the family, the whole thing is deductible.
Meals and Incidental Expenses – OK, this gets a little tricky. You can only deduct half of your meal costs but all of your incidental expenses (tips, etc.). You cannot deduct expenses for the family members who are not part of the business. The expenses must also be reasonable, so you can’t drink a magnum of champagne each night. Let’s say that you spend $50 per day for food and $100 total for incidental expenses. The family spends the same for food and no incidentals. So you have roughly $1,100 in out-of-pocket food expenses, $225 of which is deductible.
Entertainment – Sorry, but tickets to the parks and the money you spend while vacationing is not deductible. Let’s just assume that you spend $1,000 total for your tickets.
Total Bill – Tack on a few other small items and your total vacation costs $5,200.
Net Cost – Even though your total cost is $5,200, it’s not really going to cost that much. Let’s make a few assumptions about taxes now. We are going to assume that you’re marginal tax rate is 20 percent and you don’t earn the maximum for self-employment tax. After accounting for income and self-employment tax savings, the net cost of your trip will be about $4,300. In this example, then, Uncle Sam pays for about 17 percent of your trip.
This is one way that the Federal and State taxing authorities can help pay for your family’s vacation, assuming that you are self-employed. If you work for someone else and the trip is deductible, you would have to include the expenses on your Schedule A and you’d lose part of the deduction.
Another way of getting a tax break on your vacation is to combine your trip with charitable activities. Since travel expenditures on behalf of not-for-profit organizations are deductible as charitable contributions, this could be an attractive way to travel and ‘make a difference’. There are numerous agencies that can assist you in planning such a trip.
Ultimately, your job as a taxpayer is to minimize the amount you pay in taxes each year. Your job as a human being is to provide quality downtime for yourself and your family so you can maximize your contribution to society. It has been proven that taking vacation time each year assists individuals in maintaining peak performance. It is also proven that there is no reason for you to avoid planning your vacation to help reduce your taxes, as long as you follow the rules. If you have a question or want to further explore the possibilities of deducting a part or all of your vacation, give us a call. We’ll be glad to help.