If you’re like many freelancers and self-employed individuals tax season can be a time of mild to moderate frustration, with a heavy dose of “git ‘er done” mixed in. While you may be tempted to stick to only basic tax deductions (your home office, office supplies, mileage, meals, etc.) in order to reduce the time you spend surrounded by your calculator, Form 1040, receipts and other tax documents, by doing so you may be leaving significant sums of money in Uncle Sam’s pockets. As a taxpayer, you have the right to claim every legal tax deduction available—and “Go for the gold!” So consider exploring the following lesser known deductions that an astute freelancer, like yourself, may be entitled to.
1. Office furniture and equipment offer tax savings. Looking for coins between the sofa cushions? That’s chump change compared to the tax-cutting opportunity that can be found in new office furniture and equipment. If you invested in a new desk, scanner or filing cabinet last year, you have a couple of options on this year’s tax return:
a) You can deduct the full cost of the item in the year it was purchased, using the Section 179 tax deduction (which allows for a maximum deduction of $500,000) or,
b) You can depreciate the cost by deducting a portion of the expense over seven years for furniture and five years for equipment, using the IRS depreciation charts each year to calculate how much you can trim off your tax bill.
How do you know which option is most advantageous? It depends on how badly you need to reduce your taxable income. If you’ve had a great year income-wise, you’ll likely want to go with option 1. If you’re not anticipating paying that much tax this year, then you may want to use option 2 to depreciate your office furniture expenses instead.
2. Software purchases can lower your tax bill, too. The potential tax benefits of Section 179, which was recently revamped, don’t stop at office furniture and equipment. Indeed, if you use any sort of off-the-shelf or cloud-based software then you may be eligible for another tax break. It used to be that software had to be depreciated over three years. With the new and improved Section 179, however, it can be fully expensed in the year it was purchased—so go ahead and claim any eligible software purchases, just remember…video games don’t count!
3. Improve the health of your bank account by deducting your insurance premiums. A favorite topic of every freelancer and self-employed business owner is, of course, health insurance. However, the conversation doesn’t often turn to how you can deduct these expenses. If you pay your own health insurance premiums, and you weren’t eligible for other healthcare coverage (such as that offered by a spouse) you can deduct 100 percent of the cost, as long as it doesn’t exceed more than your business' net profit.
Now here’s a couple of other scenarios where your deduction for health insurance can be amplified:
First, if you employed your spouse last year, and they really worked for you (rather than simply serving as a convenient, albeit illegal, tax deduction), then you can deduct full medical premiums on your return, since as an employee, your spouse's premiums are 100 percent deductible. To make this deduction legitimate, you must also offer the same type of coverage to any other employees you may have. Second, if you have paid premiums for long-term care insurance for yourself, your spouse or any dependents, you may also be able to write-off those off as well.
4. They don’t call them “golden” years for nothing. As a self-employed individual, the burden is on you to save enough so that you can one day truly be free from working life altogether…playing euchre on a beach somewhere once you hit retirement age. To make this happen, you’ll likely need to contribute to a SEP (Simplified Employee Pension Plan), or an IRA (Individual Retirement Account) this year (or rig the next Powerball game). If you’re following the first path, and making contributions to a qualified retirement account, then remember to deduct your contribution on your personal income tax return—it’s a double bonus, of sorts. You save tax now and money for (much) later!
5. Self-employment taxes are tough, but at least Social Security contributions are tax deductible. It’s a rude awakening to some freelancers when they start their own businesses: When you're self-employed you have to pay twice as much in Social Security contributions as you would as an employee...not because you’ll get a bigger payout one day, but because you no longer have an employer to pay half. This puts you on the hook for paying self-employment taxes equivalent to 15.3 percent of your net profits. But wait—there is good news: You can deduct half of this amount on your 1040.
6. Now we’re talking! Cut your taxes with phone bill deductions. Here’s a tax deduction opportunity that many freelancers overlook: the cost of business phone calls. While it may seem like small potatoes on a daily basis, over the course of a year, calls add up. The key is to track the calls you make for business purposes by going through each monthly bill and totaling them up on a regular basis. At tax time, simply tally your year worth of monthly call costs and deduct 100 percent. This applies to calls made on both a landline and a mobile phone. Be sure to keep a copy of the bills in case you are audited. To keep things even simpler, use separate lines for business calls. Then the total expense will be deductible.
So there you have it, from scanners to software and social security to savings…there are plenty of ways that you can “Go for the Gold” and maximize your tax deductions beyond the basic “freelancer” deductions. It’s not too late to take advantage of them for this tax season, either!
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
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