If you are self-employed or an independent contractor, there are several tax deductions you should know about. From home office to travel expenses, here are five tax deductions to take into account in the upcoming year.
Deduction #1: Home Office
Whether you rent or own your regularly used workspace, you may deduct it as a home office expense. While you are more or less on the honor system in this case, you should always be prepared to provide proof of your deduction in the event of an audit.
Tthe expenses associated with your mortgage or rent, cost of utilities, and insurance can be deducted for the use of your home office. If your space of business occupies 10 percent of your home, then 10 percent of your annual electricity bill can be tax deductible.1 Some of these deductions apply only to homeowners rather than those who rent their home office space.
If you work from home or use part of it for your business, a few key deductions could give you a tax-break.
Deduction #2: Health Insurance
If you are self-employed, you likely pay for your own health insurance. You may deduct your health, dental and qualified long-term care insurance premiums. You may also deduct medical and dental insurance for your spouse, your dependents and children younger than 27 at the end of the year.2 To calculate your deduction, use the IRS Publication 535.
Keep in mind that as an 'adjustment to income' as opposed to an 'itemized deduction', you don’t necessarily need to itemize in order to claim. Note that if you are eligible to enroll in a spouse’s employee plan and choose not to, you may not take this deduction.
Deduction #3: Education
If you plan on deducting any expenses related to education, they must be related to maintaining or improving your knowledge and skills associated with your current business. If you are furthering your education with coursework related to your industry, then items such as tuition, supplies, lab fees and other related expenses may be deductible. Requirements can be reviewed using the IRS website.
Deduction #4: Travel
In order for business travel to qualify as a tax deduction, it must be longer than an ordinary workday, take place away from the general area of your home and require you to sleep or rest. Furthermore, you must engage in business activity during such a trip in order for it to be considered business-related. Whether you’re meeting with customers or gaining insight or skills related to your business, the travel must be associated in some way.3 It’s important to keep receipts and records during these trips as the IRS often keeps a close eye on this form of deduction.
Some expenses that may be considered deductible during travel include the cost of transportation (such as airfare or car rental), lodging and associated meals. While you don’t need to book the cheapest options, you won’t be able to deduct outlandish expenses. As with any trip, it’s important to keep your costs reasonable as you are the one paying the majority of them.
Deduction #5: Retirement Savings
When it comes to retirement, you have a fair amount of options as a self-employed individual. Taking into consideration your contributions to an IRA or solo 401(k) plan can help you gain tax-deferred investments down the road.
As someone working for themselves, you can contribute to a solo 401(k) plan of up to $57,000 in 2020 ($63,500 if you’re 50 or older) or 100 percent of your earned income, whichever is less. Similar to a standard, employer-sponsored 401(k), your contributions are pre-tax and distributions after age 59½ are taxed.4
This benefit will only help if you have the opportunity to take advantage of it and keep in mind that you can’t contribute more than you earn. Your specific retirement plan type may contribute to varying contribution limits and the IRS also adjusts associated maximums on an annual basis.
The Bottom Line
Being aware of these deductions can help ensure you don't leave any valuable deductions on the table. By keeping in mind whether an expense is necessary to your business operations you’ll be on the same page as the IRS as they examine your deductions. If you’re unsure of an expense and it’s deduction capabilities, or if you simply want a tax strategy to optimize your earnings, meeting with a financial advisor or accountant is a good idea.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.