Is it April already? Not quite, but it is the season of dread, otherwise known as tax season. So as you scour your files for errant receipts, collect your 1099’s, and finally figure out if you can claim your home office as a business expense, now is the time you should also explore whether you are missing out on other, lesser known deductions. Plus, there are new “twists” on well-known deductions for your 2010 return. Health Savings Accounts
One of those “hidden” tax deductions least considered by freelancers and the self-employed are HSAs, or Health Savings Accounts. They are “as good as a retirement saving account, and in some cases, even better because you get the upfront tax deduction when you contribute money to an HSA,” says Eric Tyson, author of the forthcoming Personal Finance in Your 20s For Dummies and several other best-selling personal finance books.
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“The investment earnings compound without taxation over time, and then if you withdraw the money in the future for healthcare-related expenses, you do not pay taxes on the backend. There are no retirement accounts that can give you that so-called triple-tax free benefit where you are getting the tax benefits upfront, on-going, and then on the back-end,” Tyson adds.
Even if you don’t use all of the money in your account for health care reasons, you can still withdraw money for other, non-health care expenses, although you will pay a penalty if you’re under 65. If you decide to tap into the account early, you will also need to pay income taxes on the money just like you would with a retirement account withdrawal. Other restrictions apply so read the small print if you decide to sign up.
Health Insurance Premium Deduction
Health insurance premiums are also tax deductible, but there is a new twist for 2010. When Congress passed the Small Business Jobs and Credit Act in September, it included new provisions for the self-employed. “In 2010 only, you get to write off the full amount of the premium on your tax return not as a business deduction, but as an adjustment to gross income on your personal return,” says Barbara Weltman, tax and business attorney and author of J.K. Lasser’s Your Income Tax 2011: For Preparing Your 2010 Tax Return.
Previously, self-employed individuals could deduct premiums from their income before calculating income tax, but not before calculating self-employment tax. Now, they can deduct the cost of health insurance premiums from their income before computing self-employment tax. Again, this is for 2010 only.
Home Office Deduction
Have you ever sat down and really scrutinized Schedule C to see if you are maximizing your deductions? “There are a lot of individual line items and within each line item on Schedule C, there are a lot of different things that you can take. I have found that simply the process of people proactively familiarizing themselves with what they can take as deductions gets them thinking about that during the year,” says Tyson.
| “I hear some people say, ‘Don’t take it because you are going to subject yourself to an audit.’ Well, that’s just dumb. If you are legally entitled to take a home office deduction, you should take it.” |
Most freelancers and self-employed people are aware of the home office deduction available on Schedule C, yet many are reluctant to actually take it. “I hear some people say, ‘Don’t take it because you are going to subject yourself to an audit.’ Well, that’s just dumb. If you are legally entitled to take a home office deduction, you should take it. If you are in a grey area and the deduction is not worth much, then that’s a different situation. But if you qualify based upon the reading of the rules, then by all means you should take it,” Tyson says.
Section 179 Depreciation Deduction
If you purchased a new computer, printer, iPad, or other piece of office property in 2010, the Small Business Jobs and Credit Act eased restrictions on how much you can depreciate and when. These kinds of property write-offs are known as Section 179 deductions, and for the 2010 tax year you can now, if you qualify, deduct the full cost of your new computer or printer instead of depreciating it over several years. “This 100 percent bonus depreciation is very favorable,” says Weltman. “The only caveat here is that it only applies to new property, not to pre-owned property.” The other requirement is that your office purchase must have been placed into service after September 8, 2010 in order to get the full write-off. If in use before then, you can only qualify for 50 percent bonus depreciation.
Payroll Tax Holiday
In December 2010, President Obama signed into law the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, which created a new tax break that applies to 2011 earnings, popularly referred to as the Payroll Tax Holiday. Sure, you can’t take it now, but it is a bright spot on next year’s tax horizon.
“For employees, [the Payroll Tax Holiday] means a 2 percent cut in the social security portion of their FICA. But if you are self-employed like many freelancers are, they get the benefit of this break by reducing the social security portion of their self-employment tax that would basically be considered the employee’s share. So they are going to get this break, but because they are not on the payroll, they get it by reducing their estimated taxes,” Weltman says.
| “The tax law is very complicated. There are provisions that are effective only in 2011. There are provisions that are effective for the first time in 2011, and that is a challenge for people to know what they need to do in order to take advantage of tax savings opportunities.” |
Whether you decide to take some of these lesser known tax deductions in 2010, the best overall advice for maximizing — and safe-guarding — your return is what we all (hopefully) already know: keep detailed, organized records throughout the year.
“Document, document, document. First of all, when it comes time to preparing your return, the documentation will help you to make sure you’ve captured everything and get it into the right categories on the form. Longer term, in the unlikely event that you do get audited, you’ve got the documentation to back up what you are claiming,” says Tyson.
Weltman adds, “The tax law is very complicated. There are provisions that are effective only in 2011. There are provisions that are effective for the first time in 2011. There are provisions that expire and are no longer effective in 2011, and that is a challenge for people to know what they need to do in order to take advantage of tax savings opportunities.”
The life of the self-employed is indeed rough. The key is to stay up on the latest tax laws (or, let’s face it, find a good accountant), so you can keep more of those increasingly hard-to-come-by dollars and focus on the fun stuff, like working at your leisure. After all, isn’t that why you went freelance in the first place?
NEXT >> Tax Time Tips for Freelancers
Jennifer Pullinger is a freelance writer and publicist in Richmond, VA. Visit her at www.jenniferlpullinger.com.
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