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Tax Tip

Tax Tip of the Week

The Home Office Deduction

by

Stephen S. Meredith, CPA, PLL

Whether you are self-employed or an employee, if you use a portion of your home exclusively and regularly for business purposes, you may be able to take a home office deduction.

You can deduct certain expenses if your home office is the principal place where your trade or business is conducted or where you meet and deal with customers in the course of your business. If you use a separate structure not attached to your home for an exclusive and regular part of your business, you can deduct expenses related to it, and not all these rules apply.

Your home office will qualify as your principal place of business if you use it exclusively and regularly for the administrative or management activities associated with your trade or business. There must be no other fixed place where you conduct substantial administrative or management activities. If you use both your home and other locations regularly in your business, you must determine which location is your principle place of business, based on the relative importance of the activities performed at each location. If the relative importance factor doesn't determine your principle place of business, you can also consider the time spent at each location.

If you are an employee, you have additional requirements to meet. You cannot take the home office deduction unless the business use of your home is for the convenience of your employer. Also, you cannot take deductions for space you are renting to your employer.  TRAP � don�t rent your home office space from your corporation to yourself.  You have to claim the income on your personal return and get NO deduction for the expenses of the office.  TIP � to avoid this, simply turn in an expense report listing the home office expenses and get reimbursed for them on an itemized expense report.  That reimbursement is not �rent� and doesn�t have to be claimed by you on your personal return, and the business gets to deduct it as an expense.

Generally, the amount you can deduct depends on the percentage of your home used for business.  You must allocate expenses based on square footage of the office versus the entire house.  You can use the room count method only if all rooms are substantially the same size, which is not very likely. Your deduction is limited to the amount of your gross income from your business.  Any additional expenses are carried over until used up.

Expenses that you can deduct for business use of the home may include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, and repairs. Don�t forget things like security system monthly fees.  However, you may not deduct expenses for lawn care or those directly related to rooms not used for business.  The room used for business may have some direct deductions for carpet or painting if you only do that one room.  If other rooms are done, you must allocate based on the percent business use of the home.

There are special rules for qualified daycare providers and for persons storing business inventory or product samples.  In-Home daycare providers allocate costs based on hours used, not square footage.  See the form for this method of allocation.

Stephen S. Meredith is a CPA in Richmond Virginia.  He specializes in preparing income tax returns for all types of businesses, individuals, estates, and trusts.  He also consults with new business owners on how to properly structure their business to get the maximum benefit from current tax laws.  Steve deals with many stock market and real estate investors.  He has clients nationwide and lectures regularly on tax topics. He is often a featured speaker at Van Tharp's Infinite Wealth Workshop. Contact [email protected]

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April 25-26-27, 2005, North Carolina

Learn 15 ways to develop rock-solid discipline in your trading. Discipline really means controlling your mental state. Unfortunately, most people allow their mental state to control them. In contrast, real winners maintain discipline that allows them to charge ahead of others in the field. If you play in a zero-sum trading game, like futures, you need to know every trick. These are the real secrets that separate successful traders and investors from the average person. Enroll Now

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Re-invent yourself as a trader or investor. We identified a minimum of eleven levels at which the trading game is played.  Each level has its own set of rules and tends to superimpose those rules (at least for those who are unaware) on the levels below it.  Most people reading this are probably playing at one of the bottom three levels.  As a result, there are many rules superimposed upon you that you unconsciously obey.  But you don�t have to do that � especially once you are aware of the game and how it is played. Enroll Now

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Trading Tip: 

Contrarian Indicators:  Following the Lambs to the Slaughter � Or Not

Trading Tip

by  D. R. Barton, Jr.

I like many things about sentiment analysis.  Sentiment analysis can be described as measuring the degree of optimism or pessimism in the market.  A couple of weeks ago, I described one of favorite indicators of market sentiment � major stories in the mainstream press.

I have to crow a bit about that Trading Tip, since I said that there seemed to be a top forming in the dollar when it was trading at 1.35 Euros to the dollar.  At the time, there was a cover story in Newsweek magazine talking about how bad the dollar was looking.  Since my Contrarian view of the mainstream media�s take on the dollar, it has strengthened quickly and significantly and traded today at 1.28 Euros to the dollar.

While broad indicators like press coverage are useful, there is some very meaningful sentiment analysis done on more objective measures.  One way to approach sentiment analysis is to view the proportion of retail investors that have a bullish slant and compare that ratio to the commercial interests who are bullish.

As this article goes to press, some rather significant changes are taking place, showing the retail traders and investors growing much less bullish, while the commercial traders are moving from bearish to bullish.  Here are just two indications of this shift in sentiment:

�        The American Association of Individual Investors (AAII) shows 42 percent of its survey participants are bearish vs. 25 percent on the bullish side.

�        In the Commitment of Traders Report (COT) the NASDAQ commercial traders moved to a net long position this week for the first time since December.

What can we make of this data?  For comprehensive sentiment analysis, one should ultimate look at a broader range of data to draw final conclusions.  But for now, data could be pointing to a bottoming process in the current move.  This could lead to either a new rally or just a bounce up before resuming a bigger down move.  But the bottom line is that fear in the market showing up in the retail sentiment numbers should give us reason to be cautious about our downside expectations.

D. R. Barton, Jr. is a lead instructor for Van Tharp Institute courses. He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986.  D. R. has created extensive and innovative new training products and taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques. 

His writing credits include co-authoring Safe Strategies for Fin-ancial Fre-doom and co-creator and contributing author on Fin-ancial Fre-doom Through  Electronic Day Trading. He also writes a stock screening newsletter called Ten Minute Trader, has feature articles in Market Mastery, writes for Traders-U and is a regular contributor to Tharp's Thoughts.

Editors Note: Throughout the issues you will see certain words with odd spellings, such as Fre-deom and mort-gage. This is because spam filters are likely to block message that contain certain words and this is one solution.

Trade Your Way To Financial Fre-edom

by Van K. Tharp

Learn what the best traders in the world do to produce top notch systems. The Holy Grail for you is in knowing yourself and your biases and how to overcome them. In this book, you'll learn specific techniques for overcoming your biases, entry techniques used by the masters, how to develop a high expectancy system through understanding exits, and how to achieve your objectives through proper position sizing.  There are many critical topics that most books ignore such as expectancy, R-multiples, position sizing, the importance of objectives, and many more. 344 pages. $29.95

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Feature Article

Grow Bigger Than Your Problems

By T. Harv Eker

One of the secrets to wealth is to THINK BIG! The fact is that very few people �think� big and even fewer �play� big. So why don't people want to �play big�? Usually, it�s because they believe they can't handle �big� or they don't want to handle it. Why? Because �big� often equals big responsibilities, big hassles and big problems.

One of the biggest differences between rich people and poor people is that highly successful people are bigger than their problems while unsuccessful people are smaller than their problems.

Unsuccessful people are constantly trying to avoid problems. They back away from challenges. The irony is that in their quest to make sure they don't have problems, they have the biggest problem of all... they're broke or close to it. The secret to success is not to try and shrink your problems; it's to grow yourself so you're bigger than any problem.

Imagine a �level 2� person is looking at a �level 5� problem. Does this problem appear to be big or small? The answer is that from a �level 2� perspective, a �level 5� problem would seem BIG.

Now imagine a �level 8� person looking at this same �level 5� problem. From this person�s perspective, is this problem big or small? Magically, the identical problem is now a SMALL problem.

And for a �level 10� person, it�s NO problem at all. It�s just an everyday occurrence, like brushing your teeth.

It�s important to realize that whether you are rich or poor, playing big or playing small, problems do not go away. If you're breathing, you will always have situations that aren�t perfect.

Therefore, the size of the problem is never the problem. It�s always the size of you!

The secret then is to grow yourself as a person, to be bigger than your problems so that they become insignificant and appear to disappear. Not because the problems are not there, but because you handle them so easily.

The bigger problems you can handle; the bigger business you can handle, the bigger responsibilities you can handle, the more customers you can handle and the more money and wealth you can handle.

Remember, your income can only grow to the extent that you do!

A universal principle states that �at all points in time you are either growing or dying.�  That�s why it is essential to keep learning and continue to work on yourself.

Commit to growing yourself.

Do not shrink from problems, do not avoid problems and do not complain about problems. Practice not letting problems bother you.  In fact, don�t even call them problems; refer to them as �challenges� or �situations�.

This month, practice handling problems with elegance and ease. The way to do this is to let go of your attachments, as well as the emotion and drama you create when you don�t get what you want. Just stay present and handle one situation at a time with an open mind and an open heart. Trust yourself and trust the universe that everything will work out in the end.

The bottom line is that if you become a master at handling problems, what can stop you from happiness and wealth? The answer is NOTHING!

Daily Declaration:
I am bigger than any problems.
I can handle any problems.
Nothing will stop me from getting rich.
I have a millionaire mind!

For Your Freedom,

T. Harv Eker
Best-Selling Author of Secrets of the Millionaire Mind
President of Peak Potentials Training

Reproduced with permission from the Millionaire Mind E-zine. Subscribe on-line at: www.peakpotentials.com 

Listening in....

Excerpts from Dr. Tharp's Mastermind Discussion Forum

Expectancy and Average Trade
Author: Smodato

HI,

I'm reading Van Tharp's TTWTFF (Trade Your Way to Financial Fre-edom) and I was wondering about the conceptual difference between expectancy and average trade. Sometimes he mentions a system that could have negative expectancy, but, looking at how the math expectancy is calculated I find out (maybe wrongly) it is a discretional way to determine the average trade (average trade calculates all trades in each occurrence, expectancy just divides revenues in intervals).

So how could a system with a positive income, a positive average trade have a negative expectancy?

I understand the way expectancy is calculated standardizes any result in order to compare different systems and this is clear, what is not clear to me is the mentions about negative expectancy Van Tharp sometimes puts�.. I did not found any example like that, the thing that leaves me concerned is that he speaks about a system we could be willing to trade but that could have negative expectancy, well, if I had a system report with negative average trade (and therefore negative profit) I would never trade it, so I miss the point somehow.

Thanks for your help.

Reply To This Message

 Re: Expectancy and Average Trade
Author: PMK 

Smodato,

I think the point is that some people trade not knowing that their system is negative expectancy because they have never taken the time to calculate it (or don't care). People play roulette not knowing that it pays out less than it takes in, and therefore they will lose more the longer they play. The ones who do know it is negative expectancy and still play are playing for another reason (i.e. not to make money, but for 'fun').

For example, a system could look good and be psychologically pleasant to trade if it has a win percentage of 80%, but if the total of the 20% losing trades plus commissions and other trading costs is greater than the winners, then the system is negative expectancy. Someone could trade this system if their primary motivation was to have winning trades (i.e. be correct), rather than make money. Note that they might not realize that this was their primary motivation - they may still think they are trading primarily to make money.

You are correct in that you should never trade a system that has a historical negative expectancy since if it has not worked in the past, why should it miraculously start working if you begin to trade it? So, you are not missing the point - you are ahead of the game!

Paul

Read the full, unedited thread on the forum,   link here. (Hint for finding it, look at the heading and the date) Van K. Tharp and traders, investors and wealth builders around the world connect on this site, share ideas and learn from each other. Search specific topics 

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Quote of the Week

For April Fool's Day:

We're fools whether we dance or not, so we might as well dance.  --Japanese Proverb

Fool me once, shame on you; fool me twice, shame on me. 

--Chinese Proverb

Van Tharp's Most Recent Market Update including the 1-2-3 Model and the Five Star Model.

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Look for the next update in next week's issue.

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Dr. Van Tharp's Trading Discussion Forum
  www.mastermindforum.com

Ask questions, share ideas, information and feedback with Dr. Tharp and other like-minded traders and investors. 

Feedback:

Dear Authors,

I have recently bought the book [Safe Strategies�] and am reading it thoroughly.

This is a great book where you have talked about all the correlations like inflation, deflation, currency and other strategies.

Much appreciated!