If you work for yourself, whether through contracting, freelancing, or other self-employed means, you’re entitled to a variety of tax deductions that can save you money when you file your tax return. And as an independent worker, saving money is always welcome. Here are the top five tax deductions to be aware of.
- Your Home: Working from home or using a portion of your home for business purposes can render you a deduction that can pay for some important expenses. Deductible expenses include:
- Portion of your mortgage or rent, calculated using a formula based on square footage
- Property taxes
- Utilities
- Maintenance and repairs
- Similar expenses
The IRS requires you to determine the amount of square footage of your home that is used “exclusively and regularly” for business purposes. That amount is the percent of your mortgage that can be deducted. For example: you have a home office that takes up 10% of the square footage of your home, then you are able to deduct those expenses.
If you hate calculations, you can opt for a simplified method, which is a flat $5 per square foot of your home that is used for business, with a max of 300 sq. feet. That is roughly a 17 by 17 foot area, and you don’t need as many records. Consider calculating
- Health Insurance: Purchasing policies for either you or your family may allow you a break on the cost of premiums. You are able to deduct medical and dental insurance premiums taken out for you, your spouse, and your dependents, including children under the age of 27 at the end of the tax year. Additionally, you may be able to deduct long-term care insurance premiums.
To deduct insurance premiums, you aren’t required to itemize. Instead, you take the amount as an adjustment to your income. However, if you are eligible for coverage under your spouse’s plan, but opt not to enroll, even if your own plan is less expensive, you aren’t eligible for deduction.
If you pay premiums out of your pocket, you may be able to deduct them as a medical expense. This is limited to the amount that exceeds 10% of your adjusted gross income, or 7.5% for those 65 and older. For example, a taxpayer age 50 with an AGI of $100,000 has a threshold of $10,000 before expenses can be deducted.
- Education: Running a business successfully requires a lot of smarts, likely from education. If you’ve paid for your education, you may be able to get a tax break. You are able to deduct educational expenses related to your job including:
- Tuition
- Books
- Supplies
- Lab fees
- Transportation
- Other related expenses
The courses you take have to maintain or improve the skills you need to work. You can’t deduct expenses if they are incurred for you to meet the minimum requirements or for you change careers. You can deduct expenses for education that leads to a degree. Additionally, you should check out the American Opportunity Tax Credit, the Lifetime Learning Credit, or the tuition and fees deductions.
- Your Car: Using your personal vehicle for business purposes can net you a deduction which should help make up for the expense of having to drive your own car. Basically, you get a little over one dollar per two miles that you drive for business. When the year ends, you need to calculate the total miles you drove and multiply that by the standard allowance (.54/mile) to get the amount of your deduction. If you get audited, you should have a log of your mileage to prove your deduction.
You may choose to deduct the actual expenses you incurred instead of taking the standard deduction. These expenses include gas, oil, tolls, parking fees, garage rent, insurance, lease amounts, registration, repairs, and tires. If your business uses more than five vehicles, you’ll be required to use the actual expense method. Regardless of how you take the deduction, you will need to track your mileage.
- Retirement: Saving for retirement as a self-employed individual offers you more options that you might be aware of. The most popular option is the solo 401(k). Any contributions made to this type of plan up to $53,000 annually or 100% of earned income (depending which is less) is deductible.
Since your contributions are made pre-tax, like an employer sponsored plan, only distributions taken after age 59 ½ are taxed. You’re able to contribute to the plan as an employee and an employer, deferring salary up to $18,000 in 2016, with a $6,000 catch-up contribution for those 50 and older. Also, 25% of net self-employment income is eligible to be added, as long as it doesn’t exceed the limit of $53,000.
