Five big tax breaks for the self-employed
There are many valuable tax deductions for听freelancers, contractors and other self-employed people. Here are five of the big ones.
1. Part of your house
If you work from your home or use part of it in your business, you could get a break on the cost of keeping the lights on.
What you can deduct:听A portion of your mortgage or rent; property taxes; the cost of utilities, repairs and maintenance; and similar expenses.
How it works:听Calculate the percentage of your home鈥檚 square footage that you听use, in the IRS鈥� words, 鈥渆xclusively and regularly鈥� for business-related activities. That percentage of your mortgage or rent, for example,听becomes deductible. So if your home office takes up 10% of your house鈥檚 square footage, 10% of those housing expenses for the year are deductible. There are lots of scenarios outlined in听听outlines a lot of scenarios,听but note that only expenses related to听the part of your home you use for business 鈥� say, fixing a busted window in your home office 鈥� are usually fully deductible.
What else you can do:听Choose the simplified option, which lets you deduct $5 per square foot of home used for business, up to 300 square feet 鈥� that鈥檚 about a 17-by-17-foot space. You won鈥檛 have to keep as many records, but you might end up with a lower deduction, so consider calculating听it both ways before filing.
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2. Your health insurance (maybe)
If you bought policies on your own for yourself or your family, you might qualify for听a tax break on the premiums.
What you can deduct:听All of the medical and dental insurance premiums for you, your spouse, your dependents and your children who are younger than 27 at the end of the tax year. Long term care insurance premiums also count.
How it works:听It鈥檚 an adjustment to income rather than an itemized deduction, which means you don鈥檛 necessarily have to itemize to claim it. But you might be听let down, because if you鈥檙e eligible to enroll in your spouse鈥檚 employer鈥檚 plan 鈥� even if you choose not to, maybe because听it鈥檚 more expensive than your own 鈥� you can鈥檛 take the deduction.
What else you can do:听Find out if you can deduct the premiums as a medical expense. This works only if you pay your premiums out of your own pocket, and your deduction is limited to the expenses that exceed 10% of your adjusted gross income, or 7.5% if you鈥檙e 65 or older. So if you鈥檙e 40 and your AGI is $100,000, your first $10,000 of medical expenses isn鈥檛 deductible.
3. Your education
You have to stay smart to run a growing business, and there are tax breaks for that.
What you can deduct:听The costs of 鈥渜ualifying work-related education,鈥� including tuition, books, supplies, lab fees, transportation to and from classes and related expenses.
How it works:听The expenses are deductible only if the education 鈥渕aintains or improves skills needed in your present work.鈥� In other words, if you鈥檙e taking classes to change careers or you鈥檙e working toward the minimum educational requirements for a trade or business, this probably won鈥檛 work for you. But you can qualify even if the education leads to a degree. Review听听for the requirements.
What else you can do:听Look at the American Opportunity Tax Credit, the Lifetime Learning Credit or the tuition and fees deduction.
4. Your car
Driving to meet vendors, make pick-ups and woo clients can be hard on your car, but you might recoup some of that wear and tear on your tax return.
What you can deduct:听A little more than $1 for every two miles you put on your car for business purposes.
How it works:听At the end of the year, tally the number of听miles you drove in the car听for business, multiply that by the IRS鈥� preset standard mileage rate 鈥� 54 cents听per mile in 2016 鈥� and deduct the total. Be sure to keep a mileage log; you鈥檒l need it if you鈥檙e audited.
What else you can do:听Deduct your 鈥渁ctual car expenses鈥� instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You鈥檒l have to do this anyway if you鈥檙e using five or more cars in your business, and you鈥檒l have to track your mileage for either method. If you鈥檙e leasing your car, check out听听for rules about the amount of lease payments you can deduct.
5. Your retirement savings
You might have more options than you think when it comes to saving for retirement as a self-employed person. One popular choice is the solo 401(k).
What you can deduct:听Contributions to a solo or one-participant 401(k) plan of up to $53,000 per year or 100% of earned income, whichever is less.
How it works:听Just like a standard, employer-sponsored 401(k). Your听contributions are pretax, and distributions after age 59陆 are taxed. You can contribute as both an employee (of yourself) and the employer, with salary deferrals of up to $18,000 in 2016, plus a $6,000 catch-up contribution if you鈥檙e 50 or older. And听you can add approximately 25% of net self-employment income, not exceeding that $53,000 limit.
What else you can do:听.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email:听torem@nerdwallet.com.
The article听听originally appeared on听.
