17 Mar

Tax Advice for Freelancers: There’s Still Time!


It’s Not Too Late to Claim These Often Overlooked Freelance Tax Deductions

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 when it comes to reducing their taxable income with legitimate tax deductions. In fact, many do not take tax deductions that they are eligible for – which could save money in the long run. Here, Jonathan Medows, CPA, founder of CPA for Freelancers® answers common questions about tax breaks that more freelancers should consider taking advantage of.

Q: What are the major overlooked tax deductions?

JM: One in four American households have home offices. That’s about 26 million. But only a small percentage of taxpayers claim the home office tax deduction. 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.

Q: Why not?

JM: 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 expenses up to the net annual income from your business. That includes depreciation, rent, insurance, utilities, maintenance and general repairs.

Q: What makes someone eligible for it?

JM: Your home office must be your principal place of business, used regularly and exclusively for business. You can’t claim your rec room is a home office if you do more recreation than work there, for instance. And it must be on your property – not in someone else’s building.

Q: What other tax deductions are often overlooked by freelancers?

JM: There are many business expenses unrelated to the home, such as advertising, office supplies, legal fees, professional dues and subscriptions, which 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.

Q: What advice do you give freelancers about keeping tabs on those expenses?

JM: 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.

Q: What other benefits are freelancers missing out on?

JM: 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 2016, 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.

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.

Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.

 


2,335 thoughts on "Tax Advice for Freelancers: There’s Still Time!"

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