After working with freelancers for many years, the CPA for Freelancers™ team has developed a tax deductions checklist to help the self-employed keep more money in their pockets at tax time. Most independent business owners don’t want to mess with the IRS. It’s a good impulse, but unfortunately sometimes it makes them overly cautious. Many do not take tax deductions that they are eligible for – which could save them money in the long run. Here are some questions and answers about tax breaks for freelancers.
A: One in four American households have home offices. That’s about 26 million. But only 3.4 million taxpayers claimed the home office tax deduction in 2010, the most recent year for which figures are available. While not every home office is tax deductible, it’s safe to assume a lot of eligible people are not taking the home office deduction.
A: There have always been worries about the home office deduction being a red flag for a tax audit. But that doesn’t seem to be true anymore, with the numbers of people working from home increasing every year. And if you’re eligible for it, you should claim the deduction. Last year, the IRS even made it easier to take. They introduced a new, simplified method of claiming up to $1,500 annually with reduced paperwork and recordkeeping. If you use the simplified method, you cannot depreciate your home office but you can claim allowable mortgage interest, real estate taxes and casualty losses as itemized deductions.
And you can still take the deduction the old-fashioned way, too, which allows you to deduct a percentage of your home expensesup to the net annual income from your business. That includes depreciation, rent, insurance, utilities, maintenance and general repairs.
A: Your home office must be your principal place of business, used regularly and exclusively for business. You can’t claim yourkid’s bedroom is a home office, for instance.And it must be on your property – not in someone else’s building.
A: There are many business expenses unrelated to the home, such as advertising, office supplies, legal fees, professional dues and subscriptions, that are fully deductible for freelancers. If you travel to meet clients or attend conferences, that’s deductible. And if you entertain clients – pick up the tab for a meal or concert – that’s all tax deductible.
A: It’s very important to keep good records, either electronically or on paper. Establishing a separate business bank account, rather than running business expenses through your personal checking account, simplifies record keeping. And so does using a designated credit card for business expenses: Review your statements for that card to make sure you’re not missing items that could be taken as expense deductions on your tax return.
A: When you’re self-employed, you need to set up your own savings for retirement. Opening a retirement account, such as an IRA, allows you to put aside pre-tax money every year for retirement. In 2015, you can contribute up to $5,500 (or $6,500 if you’re age 50 or older) to an IRA account. These contributions are made pre-tax, meaning they lower your income level and your tax liability. You have until April 18, 2016 to make your 2015 IRA contribution. Make sure you determine how much of your IRA contribution you can deduct; the amount varies depending on whether your spouse is covered by a retirement plan through an employer.
Also, if you have college students and you’re paying higher-education costs, the American Opportunity Tax Credit may apply to you at tax time. It’s the most generous credit and can be applied to more than one student at a time if you are footing the bill for your kids’ educations.
Finally, it’s not exactly a tax credit, but simply keeping good records and paying your quarterly estimated tax on a timely basis can save you money – in the form of penalties and interest – at tax time.