When it comes to doing taxes, there are people who write off expenses — such as freelancers and entrepreneurs — and those who don’t. There are also those who know it would financially benefit them to write things off, yet they aren’t, at least not yet. Before you can determine if you should do so, you may wonder what it means to write something off on your taxes.
“A write-off, also known as a deduction, is generally any expense that you can use to reduce your taxable income,” Andrea Coombes, tax specialist for NerdWallet, tells Bustle. “For example, mortgage interest is a write-off, because when you go to do your taxes, you can take the amount of mortgage interest that you paid, and subtract that amount from your taxable income.” As a result of that deduction, she says, you end up paying less in total taxes.
Coombes says it’s also important to note that, in most cases, you can’t deduct an expense and claim the standard deduction. “For most write-offs, you can either take the standard deduction, or you can itemize — you can’t do both,” she says. “But there are a handful of deductions ‘above the line’ — that means you don’t have to itemize to claim them.” An example of this would be claiming the standard deduction and deduct student loan interest that you paid, she says.
Figure Out If Itemizing Is Best For You
It’s important to make sure that claiming the standard deduction, rather than itemizing, is best for you, Coombes says. “Now that the standard deduction is almost double what it used to be, it’s likely that fewer people will itemize,” she says. She suggests adding up all of your expenses that are deductible, including things like property taxes, charitable contributions, and mortgage interest. “If the total of your deductible expenses is higher than the standard deduction, then you itemize; if that total is lower, then you claim the standard deduction,” she says.
Make Sure You Report All Your Income
Unlike income received from an employer via a W-2, no taxes are withheld from the income you earn freelancing and/or working for yourself. “In addition to owing self-employment tax of 15.3 percent, you’ll pay federal income tax on your earnings at a rate of 10 to 37 percent of net profits,” Nathan Rigney, principal tax research analyst at The Tax Institute at H&R Block, tells Bustle. So, he says that you must make sure that you report all your income — even if a company didn’t send you a 1099.
“You won’t receive a W-2 for freelance work, but if you’re performing services for businesses, you should receive a 1099 reflecting the income earned working,” he says. “All income earned through a business, as an independent contractor or from informal side jobs, is self-employment income, which is fully taxable and must be reported.” In addition, Rigney says the IRS receives a copy of any 1099s you receive and will match that information against your tax return — to make sure you’re reporting all income — so it’s best to not take any chances.
Organize All Your Work-Related Expenses
When you’re planning to write things off, it’s important to keep all receipts for your work-related expenses. “You can claim expenses related to running your business — i.e., advertising, vehicle licenses, and car expenses, such as gas and repairs — as deductions on your tax return,” Rigney says. “Keep a log of miles you travel for business to calculate deductible vehicle expenses.”
In addition, several tax software programs exist to help you keep track of your expenses all year long, so you don’t have to gather everything up at the last minute before filing. For instance, programs like H&R Block Premium cater to those who are self-employed.
Figure Out What To Write Off
When it comes to deductions, there are several different things you can write off if you’re a freelancer or self-employed. But, before doing so, Rigney says to figure out all your expenses. “Since you probably spend a significant amount of money running your business (on things like gas and car washes), you’ll want to claim those expenses as deductions,” he says. “Similarly, if you use part of your home as your business office, you may be able to deduct part of your mortgage interest and real estate tax as a business expense, or use the safe harbor deduction of up to $1,500.”
Mike Savage, CPA and CEO of 1-800Accountant, tells Bustle that you can also write off things like out-of-pocket costs incurred while doing charity work. “When people are focused on volunteering and engaging in activities that serve the welfare of the public, they are not typically focused on the tax benefit they can derive from these volunteer activities,” he says. “But if you drive your car for charitable purposes, you can deduct $0.14 per mile, plus parking and tolls paid.” He says that, often, people are focused on the charitable donations that they make by check, money order, or credit card payment and may overlook car-related expenses when volunteering their time.
Aside from deductions for business expenses, those who are self-employed will receive a new deduction this year, the qualified business income deduction, Rigney says. “It can be worth up to 20 percent of qualified business income,” he says. “This is generally the net income from the business activity reduced by a couple of business-related adjustments taken on your 1040.”
Of course, you may not be 100 percent certain on what to write off —and that’s common, David Cawley, CPA and chief financial officer at Fraim CPA, tells Bustle. “When it comes to taxes, some people don’t take full advantage of the expenses they are able to claim because they tend to be risk-adverse and are concerned they may be pushing the limits of the tax code,” he says. “While every taxpayer should stay within the parameters of what is appropriate under federal and state tax law, many business owners and freelancers miss out on deductions the IRS would otherwise consider appropriate given their situation.”
However, Cawley says this does not mean taxpayers should write off everything they can. “An important rule of thumb when considering if an expense is a true business expense and can be written off is to ask if the expense incurred was in hopes to create more revenue or help support current revenue streams,” he says. He adds that some of these include the cost of products purchased and resold to customers — i.e., the business would never have purchased the inventory without the intent to sell it. “There are, however, many other expenses that aren’t so obvious but can be profit-driven, such as meals with existing or potential customers, dues and subscriptions (wholesale clubs, referral groups, etc.), and the business portion of cellphones, home phones, and home internet use.” And the most commonly missed business deduction Cawley sees? “Automobile expenses, which nearly every business has at least some,” he says. “There are several mileage tracker applications (such as MileageIQ) across different smartphones that make the process easy and accurate.”
When In Doubt, Speak To A Tax Advisor
Norma Gonzales, tax advisor and founder of Norma Sarabia & Associates, tells Bustle that, all in all, the best thing you can do is talk to a tax professional before writing things off. “With the many changes, because of the new tax reform law affecting 2018 taxes, there is no ‘one size fits all’ for this,” she says. “This is one of those loaded questions, as each freelancer and company has its specialty and, therefore, different write-offs.” For example, a photographer cannot write off the same things that a personal trainer can, she says.
So, if you’re a freelancer or self-employed and not writing off expenses, now’s the time to see if it’s a viable option for you.