With just a few weeks left to file your freelance taxes, there’s no time to waste when it comes to completing your return. Given all of the changes that the Tax Cuts and Jobs Act (a.k.a. tax reform) has brought with it, you may be left feeling unsure about how tax deductions and tax credits will impact you now. Here are some pointers to help clear up the most common areas of confusion about tax exemptions, deductions and credits:
Personal tax exemptions are eliminated. One of the line items on your return where you are likely to see some of the biggest changes is that related to the personal tax exemption. Up until the 2018 tax year, you could claim a personal exemption of $4,050 for yourself, your spouse and each of your dependents. Under tax reform you cannot claim a personal exemption any longer. However, the new tax laws have introduced a much larger standard deduction which may indeed offset this loss for many freelancers.
Standard deductions are increased. There is now a standard deduction of $12,000 per individual taxpayer ($24,000 for married taxpayers who file jointly). This is notably larger than both the previous standard deduction of $6,350 per individual or $12,700 for married taxpayers who filing jointly and the now defunct personal exemption. Where the confusion may come in is when you try to decide if you should take this standard deduction or itemize your deductions.
While experts estimate that less than half of all American taxpayers itemize their taxes, for some people it is an important way to lower your tax obligations. This may be especially true if you are a freelance business owner who has significant expenses to deduct. If your eligible deductions exceed the new standard deduction, then it may pay for you to itemize. If they don’t then, you are likely best off just sticking with the standard deduction.
Keep in mind, however, tax reform has eliminated or reduced several long-standing tax deductions such as those for moving expenses, alimony payments, state and local taxes, as well as mortgage and home equity loan interest. Be sure to factor the changes to these and other deductions into your calculations.
Changes to dependent tax credits. In most cases, the qualifying rules for dependents remain the same as they were before the TCJA. If you are a freelancer claiming dependents on your tax return there are some important updates to tax credits under tax reform that you should note:
With all of the changes tax reform brings to exemptions, deductions, credits and other areas, you may find that completing this year’s return may be a little more challenging than previous years. If you haven’t already started working through your tax return, don’t postpone it any longer, after all Netflix will always be there once your return is filed. If you need help, consider reaching out to a tax professional—but be aware they may advise you to file an extension depending on how complex your return and your tax situation is.
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.
©2021 MEDOWS CPA, PLLC