5 TAX BREAKS FOR THE SELF-EMPLOYED
Being your own boss as a self-employed worker has its perks, but it also has its downsides. Even if you’re just doing a bit of part-time work from a computer at your kitchen table, you still must wear many hats, including that of tax planner. While few Americans take joy in filing their annual returns, it’s crucial to do a thorough job if you’re self-employed. There might be big deductions you’re eligible for that allow you to keep more of that hard-earned money. It can be a costly surprise to many just starting out as self-employed individuals or independent contractors getting 1099s instead of W-2 tax forms.
1 SELF-INSURANCE
Without the ready-made benefits package provided by larger corporations, many self-employed Americans also must be self-insured. Thankfully, premiums for medical, dental and long-term care insurance are deductible from your taxes. The deduction can be very large but also saves you by preventing the “individual mandate” penalty suffered by uninsured taxpayers with the Affordable Care Act, also known as “Obamacare.” While it’s uncertain what will happen with the ACA going forward, for tax year 2016 there is a penalty of $695 per adult or 2.5% of household income if you’re uninsured, whichever amount is greater.
2 RETIREMENT SAVINGS
Self-employed individuals can save a lot more for retirement in vehicles like a solo 401(k), said Michael McCauley, a certified public accountant in New Jersey. That’s because “maximum retirement thresholds vary based on income,” he said, and can reach as high as $53,000 for tax year 2016 or even $59,000 for those over age 50. That kind of savings isn’t just a great way to supercharge your nest egg; it’s also a powerful way to defer taxes on the income earned by your business.
3 SUPPLIES AND PROFESSIONAL DUES
Whether it’s a $2,000 computer to design websites or a $2 pen to write down appointments, expenses on job-related materials are deductible — and collectively, they can add up in a big way. Often overlooked, however, are job-associated dues that include fees for trade associations or even subscriptions to periodicals and journals that are relevant to your profession.
4 HOME-OFFICE DEDUCTION
Many self-employed people work out of their homes, and it’s easier than ever to access related tax breaks thanks to a simplified home office deduction, said Lisa Greene-Lewis, a CPA and tax expert for TurboTax. The IRS allows you to declare $5 per square foot of your home used for business up to 300 square feet, or a maximum of $1,500, as long as the space is “exclusively and regularly” for business-related use. And if you have significant expenses, including utilities, maintenance or even mortgage interest on the home itself, you can itemize your individual home office expenses for an even bigger break above that maximum.
5 TAX AND LEGAL ADVICE
If you’re intimidated by all this or just worried you’re leaving something out, don’t panic. The IRS allows a deduction for tax-preparation expenses, as well as other professional legal and accounting services necessary for the efficient operation of your business, Greene-Lewis said. In fact, TurboTax just launched a software service specifically for the self-employed that can find deductions simply by browsing through transactions in your bank account.
“It helps discover deductions that they didn’t even know were possible,” Greene-Lewis said of TurboTax, which means you not only get a tax break for buying the software but also score plenty of other deductions thanks to the added advice.
Don’t overlook the benefit of accounting software or hiring a tax professional such as a CPA, particularly considering that these expenses are tax-deductible themselves.