What Are Tax Deductions for Self Employed?
Do you want to know what are tax deductions for self employed? All Americans should try to get every penny of tax owed to them, but not pay a penny more. With that in mind, one of the best things you can do to make sure your tax bill is as low as possible is to understand how tax deductions work. There are many valuable tax deductions for freelancers, contractors, and others who are self-employed.
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Here are five self-employment tax deductions to remember:
1. Part of your house
If you work from home or use part of it in your business, some self-employment tax deductions could give you a break in the cost of keeping the lights on.
What you can deduct: part of your mortgage or rent; property taxes; the cost of utilities, repairs, and maintenance; and similar costs. This deduction is normally only available to freelancers; employees cannot take the deduction from the home office (there are some exceptions).
How it works: Calculate the percentage of square footage of your home that you use, in IRS words, “exclusively and regularly” for business-related activities. That percentage of your mortgage or rent, for example, becomes deductible.
So if your home office occupies up to 10 percent of the square footage of your home, 10 percent of the housing costs for the year are deductible. IRS Publication 587 describes many cases, but be aware that only expenses directly related to the part of your home you use for business, for example fixing a bus window in your home office, are generally fully deductible .
What else you can do: Choose the simplified option, which allows you to deduct $ 5 per square foot of home used for business, up to 300 square feet, that is, a 17-by-17-foot space. You don’t have to keep as many records, but you may have a lower deduction, so consider calculating it both ways before filing it.
2. Your health insurance
If you bought policies for yourself or your family, you may qualify for a self-employment tax deduction on premiums.
What you can deduct: Health and dental insurance premiums for you, your spouse, dependents, and children under the age of 27 at the end of the tax year. Long-term care insurance premiums are also included, although there are specific rules. IRS Publication 535 has the data.
How it works: It’s an income adjustment rather than an itemized deduction, which means you don’t have to make an item to claim it. It may expire, because if you are eligible to enroll in your spouse’s employer plan, even if you choose not to, perhaps because it is more expensive than yours, you cannot claim the deduction to take.
What else you can do: Find out if you can deduct the premiums as medical expenses. This generally only works if you pay your premiums out-of-pocket, and your deduction is limited to costs that exceed 7.5 percent of adjusted gross income. So if your adjusted gross income is $ 100,000, your first $ 7,500 of medical expenses are not deductible.
You have to stay ready to run a growing business, and for that, there are self-employment tax deductions.
What you can deduct: the costs of “qualified work-related education,” which includes things like tuition, books, supplies, lab fees, transportation to and from classes, and associated costs.
How it works: Costs can only be deducted if education “maintains or improves the skills required for your current job.” In other words, taking classes to change careers or work toward the minimum educational requirements of your trade or business may not work for you. But you can qualify even if education leads to a degree. Review IRS Publication 970 for requirements.
What else you can do: Take a look at the American Opportunity Tax Credit or the Lifetime Learning Credit.
4. Your car
driving your car to meet sellers, pick up, and attract customers can be difficult, but some self-employment tax deductions can help you regain some of that wear and tear.
What you can deduct: Just over $ 1 for every two miles you put in your car for business purposes.
How it works: At the end of the year, the number of miles you drove for business, multiply that by the standard IRS default mileage rate: 58 cents per mile in 2019 and 57.5 cents per mile in 2020 – and eliminate the total. Be sure to keep a mileage record; you will need it if they inspect it.
What else you can do: Deduct the “real costs of your car”. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rentals, insurance, lease payments, registration fees, repairs, and tires. You may have to do this anyway if you are using five or more cars in your business. If you rent your car, see IRS Publication 463 for the rules on the amount of lease payments you can deduct.
5. Your retirement savings
You may have more options than you think about retirement-related self-employment tax deductions. A popular option is the 401 (k) individual.
What you can deduct: Individual or participating 401 (k) contributions up to $ 56,000 in 2019 ($ 62,000 if you are age 50 or older) or 100 percent of earned income, whichever is less. In 2020, the limit is $ 57,000 ($ 64,500 if you are age 50 or older) or 100% of earned income, whichever is less.
How it works: As an employer sponsored 401 (k) standard. For a single traditional 401 (k), your contributions are predetermined and distributions are taxable after age 59. You can contribute as an employee (yourself) and as an employer, with salary deferrals of up to $ 19,000 in 2019, plus an additional contribution of $ 6,000 if you are 50 or older (those limits will increase to $ 19,500 and $ 6,500 to 2020). And you can add approximately 25 percent of net self-employment income, without exceeding that limit of $ 56,000 in 2019 or $ 57,000 in 2020.
Before you go, I hope this article on what are tax deductions for self employed is helpful for you.