Introduction
If you’re like most self-employed people, you’ve probably paid a lot of tax this year. It’s time to start gathering your deductions together so that you can reduce your tax burden. For many freelancers and small business owners, the key to reducing their tax bills is finding ways to write off expenses that they might not otherwise be able to take as a deduction.
What You Can Deduct
Depending on your situation, you may be able to deduct certain expenses. If a deduction reduces your taxable income, it’s like getting a discount on the taxes you owe.
There are two types of deductions: itemized and standard. To claim an itemized deduction on your tax return, you’ll need to complete Form 1040 Schedule A (PDF). You can also use the shorter Form 1040EZ if all three of these things apply:
- Your income is $100K or less
- You’re single and don’t have any dependents
- You don’t claim any other dependents as exemptions
Travel Expenses
A travel expense is any expense directly related to your business and incurred while you are away from home. For example, if you meet in another city and stay overnight at a hotel or motel, the room cost is a deductible travel expense.
The IRS defines “away from home” as being away from your principal place of business for more than one night (or more than 100 miles out), or any other location that doesn’t qualify as your main place of business. If this applies to you–and most freelancers will qualify–you can deduct most expenses associated with getting there and back again: airfare, rental car fees, taxi fares, parking costs, tolls; bridge, road or tunnel tolls when traveling by private vehicle over public roads between two places within one state (even if an interstate highway doesn’t connect those places); subway fares if they’re part of an uninterrupted trip between two locations in one city (again even if an interstate highway doesn’t connect those locations).
Self-Employment Taxes
If you’re self-employed, you’ll likely have to pay self-employment taxes. These are different from income taxes and are paid in addition to them. Self-employment taxes are calculated on net self-employment income (the amount of money that remains after paying business expenses). These two types of tax payments go toward Social Security and Medicare for yourself and unemployment insurance coverage for your employees if applicable.
Health Insurance Premiums
If you’re self-employed, you can also deduct your health insurance premiums. You may be able to deduct the cost of long-term care insurance for yourself, your spouse, and your dependents.
You can also deduct the cost of health care coverage for a child under age 27 who qualifies as your dependent (this includes coverage provided by an employer).
Insurance Deductions
- Health insurance premiums paid
- Life insurance premiums paid (i.e., life insurance on your own life)
- Disability insurance premiums paid (if you’re self-employed, you can deduct the cost of your disability insurance)
- Long-term care insurance premiums paid (if you have long-term care coverage and are paying for it out of pocket)
If an employer group health plan covers you, then you should receive Form 1095 from them by February 1st of each year. Otherwise, if you purchased individual health coverage through the Marketplace, then use Form 8962 to calculate your premium tax credit (or any other types of credits related to healthcare).
Charitable Donations
- What kinds of donations qualify?
- How do I report donations on my tax return?
- What are the different types of donations that can be deducted?
- How much do I need to donate before it’s worth claiming on my taxes?
You may hear some people say they don’t have any money left over at year’s end because they’ve already donated their maximum allowable amount. But there are other ways to get a tax benefit from charitable giving. For example, suppose you’re married and file jointly with your spouse. In that case, the IRS allows each person who itemizes deductions (which means he or she claims deductions beyond those automatically claimed by being single) up to $10,000 in charitable contributions annually. If both spouses donate more than $10K but less than $20K total during a given year, each spouse must claim half of their total donation as an itemized deduction–but only one-fourth of any excess over $20K would be eligible for this rule.* How do I deduct gifts made directly from my checking account or savings account into charities’ accounts instead of sending checks by mail? The difference between charitable donations and gifts is significant because only certain types qualify as deductible expenses when filing taxes.* Common mistakes people make when claiming charitable contributions include not keeping good records; not knowing which organizations are eligible charities; forgetting about employer matching programs; making multiple small payments throughout the year rather than one lump sum at the end-of-year deadline
Energy-Saving Measures
You can deduct the cost of installing energy-efficient windows, doors, insulation, and storm windows. You can also deduct the cost of replacing old appliances with new ones that are more energy-efficient.
- Window replacement: If you install new windows in your home this year and it improves the energy efficiency of your property by at least 30%, then you might be able to deduct some or all of the costs from your taxes (depending on how much money you make). The IRS allows homeowners who make under $50,000 per year to take advantage of this tax break without any restrictions on which type of window they use–as long as it meets certain criteria for efficiency levels and size requirements (for example: single panes must not exceed 36″ x 48″).
- Appliance replacements: If you’re looking for a way to cut down on those monthly bills while saving money at tax time? Look no further than updating old appliances with newer versions that use less power but do just as much work! This could include everything from refrigerators to dishwashers; simply check out these guidelines first so there aren’t any surprises later when filing returns next year!
Mortgage Interest Deductions
A mortgage interest deduction is a tax break that allows homeowners to deduct their mortgage interest from their taxable income. The deduction amount you can claim depends on the type of loan you have and how much money it costs to pay off each year.
For example, if your home costs $200,000 and has an adjustable rate loan with monthly payments starting at $1,200 (and rising over time), then your maximum annual deduction would be $12,000 ($1120 x 12 months).
But what if your house was worth less than $500K? Or what if its value rose above this threshold during 2018? In these cases–and others like them–you may still be able to take advantage of some other tax benefits related specifically toward homeownership:
Home Office Deductions
If you use a portion of your home as an office, there are several ways to deduct the costs. First, suppose you use part of your home for business purposes, and that space is also used for other purposes (e.g., sleeping or eating). In that case, it qualifies for a deduction as long as it meets two criteria: 1) The total square footage used for business must be identifiable from other areas in the home; 2) You conduct work there on at least 50% of the days during which it’s open for use during the year (non-business days).
If this sounds like what you have going on at home, then go ahead and add up all related expenses like rent payments (if applicable), utilities/power bills, insurance premiums related specifically toward having an office versus just living in general–even if they’re bundled into one bill with other services like cable TV–along with any additional furniture or equipment purchases required just so they could do their job without having any problems doing so later down the line when tax time rolls around again next year.”
Deductions can help reduce your tax bill.
Deductions are used to reduce your taxable income. If you’re self-employed, deductions can be especially helpful in reducing your tax bill. The IRS provides a list of common business expenses that you may be able to deduct (or “write off”). These include:
- Business travel
- Supplies and equipment purchases
- Advertising costs
You might not be able to deduct all of these expenses because they’re only allowed if they’re “ordinary and necessary” for your business. You’ll need good records to prove that a cost is ordinary and necessary–for example, if you buy a new computer for work purposes but also use it occasionally at home for personal reasons, only part of that cost may qualify as an allowable deduction (the amount related solely to work purposes).
Check For Updated Rules
Congress has been known to change the rules late in the game. What is deductible now may not be deductible by the time you file your taxes. Then too, they may give you incentives and deductions that attempt to fix a problem like the devastation caused by COVID-19.
Hiring an accountant to do your taxes may seem costly, but they can save you time and money in the long run. They are current on the latest rules, allowable deductions, and depreciation schedules. Most likely, you don’t have time to follow all the changes in tax law. Accountants subscribe to information sources and newsletters that keep them sharp. If nothing else, you can sleep well at night knowing a good accountant will help you with any potential audit and will most likely save you from penalties and interest because you made some error in math or understanding.
Yes, it’s time to start thinking about your taxes, as much as we hate to tell you that.
