Taxes: How to Maximize Your Deductions

Ah, tax season. It’s the most wonderful time – or not. Besides organizing receipts and gathering all the required paperwork to file, you’re probably most curious on how to maximize deductions. With all the changes from the Tax Cuts and Job Acts of 2017, filing your tax returns for 2018 is sure to be a befuddling year. In turn, you may be having a particularly tough time figuring out how to lower your taxable income.

Whether you have an employer or are a self-employed freelancer, here’s how to bolster your tax deductions and decrease what you owe Uncle Sam.

Be Proactive

Tai Stewart, Founder of Saidia Financial Solutions, recommends doing a quarterly or mid-year review of your overall financial picture. “That way you can have an informed estimate of your tax liability,” says Stewart. “In turn, it’ll allow you to make changes and adjustments to where and how you shelter income, take advantage of qualified credits, and so forth.”

Max Out on Your Roth IRA Deductions

In 2018, the contribution limit for IRAs was $5,500. If you’ve yet to contribute the max amount for 2018, you have until April 15 of this year to contribute and receive some tax savings and lower what you would owe to the IRS, explains Stewart.

Note that only contributions made to Roth IRAs can lower your taxable income. That’s because Roth IRAs are tax-deferred, which means you owe taxes later when you start taking money out. Traditional IRAs are pretaxed, which means you owe taxes on your contributions now.

Keep Detailed Records

If you’re a small business owner, keep detailed records and separate your business from your personal income and expenses, recommends Stewart. “Not only will you be in compliance with the IRS, but you will also be able to ensure that you don’t miss any expenses that can be deducted from your tax return,” says Stewart. “Each expense helps bring down your taxable income, so if you commingle money, you may miss out on a deductible expense.”

Be in the Know of Changes After the Tax Cuts and Jobs Act (TCJA)

What you don’t know about the changes due to the TCJA could certainly have you missing out on valuable tax savings.

Elimination of  Unreimbursed Employee Expenses

Before the TCJA, if you were taking the itemized deduction, you were able to deduct unreimbursed employee expenses, explains Stewart. This might’ve included safety equipment or supplies you need to do your work or required uniforms that you wouldn’t be able to wear outside of your job. That’s since been eliminated. Depending on your job, income and filing status, if that was something you regularly used, it can significantly affect your tax return, explains Stewart.

Personal and Dependency Exemptions have been Nixed

For a family of four, they could see an increase in taxable income by as much as $16,600, explains Stewart. “So, an increase in itemized deductions, such as charitable contributions or medical expenses, could possibly offset some of the loss deduction money,” says Stewart.

State and local taxes is now limited to $10,000 on itemized deductions. “For those who live in states with income tax and who regularly deducted more than that, this could affect them negatively,” says Stewart.

Doubling of Child Tax Credits

The Child Tax Credits have doubled from $1,000 to $2,000 per child under the age of 17. “For some families with smaller children, this may help offset any negative impact that the elimination of the dependent exemption has created,” says Stewart.

Lowered Tax Brackets

What’s more, the overall tax brackets have also been lowered for everyone. If you’re wealthy, this can equate to hundreds of thousands of dollars in tax savings.  “For the middle class, I’m not seeing a lot of advantages, and in some cases, taxes have gone up,” says Stewart. “It’s important to examine your individual situation regularly so that you don’t end up with a surprise higher tax bill at tax time.”

Maximizing Tax Deductions When You’re a Freelancer

If you’re a self-employed freelancer, here are some ways you can make the most of tax deductions.

Personal Expenses

You can deduct a percentage of certain personal expenses that are also used for business purposes. “Freelancers occupy this strange in between place,” explains Katherine Pomerantz, Founder of The Bookkeeping Artist. “They’re individuals, but they’re also a business.”

Bottom line: most personal expenses aren’t tax deductible. But, because business expenses are, and because freelancing occupies this middle ground between business and personal, a portion of many personal expenses become legitimate tax deductions.

The most common expenses freelancers can deduct for taxes is the internet and phone bill. “Most freelancers use their home Wi-Fi and their personal cell phone to do work, and the time you spend working on each is deductible,” says Pomerantz. “You simply to need to track your time and keep a record of the hours worked.”

Just be sure to keep up-to-date, accurate records because the IRS does not accept estimates. To maximize their deductions, Pomerantz recommends freelancers use a time-tracking app or keep their own time ledger.

Home Office Deduction

In order to claim the home office deduction, you must use your home office space exclusively and regularly as the principal location of your business. “If you use that space for work during the day, but then turn it into a dining room at night or watch TV there on the weekends, then the room doesn’t qualify.” says Pomerantz. “What’s more, renting an outside office or a shared coworking space also excludes you.”

There are a couple of exceptions to the exclusive-use rule, points out Pomerantz. One is if you store inventory or equipment in your home. “Let’s say you drop ship through Amazon, or you’re a musician who uses your space to store instruments and sound equipment,” says Pomerantz. “Then the storage area is deductible. Just make sure all business storage is clearly partitioned off.”

Look for Tax Savings from Your “Build-Your-Own” Employee Benefits Package

While freelancers don’t have the advantage of an employer-matched 401(k) or health insurance, they can also be big tax deductions.

First, freelancers should look at maximizing their tax savings by opening a self-employed retirement account like a SEP IRA, SIMPLE IRA, or Solo 401(k) plan, recommends Pomerantz. “These savings are tax-deferred, (you pay taxes on them later, when you take out contributions). And depending on your situation, you could save 100% of your self-employed income, such as in the case of a SIMPLE IRA, or over $60,000 in one calendar year (in the case of a solo 401(k).”

Health care is also another way to lower your taxes. “While health insurance can be very expensive for freelancers, you should not shy away from this important expense,” says Pomerantz. If you’re self-employed, you can deduct health insurance premiums, and some medical expenses are deductible on your personal income return. “HSAs also allow individuals to pay for medical taxes with pretax dollars, saving you even more tax expense,” says Pomerantz.

Don’t Spend to Save

The quote you need to spend to save doesn’t apply when it comes to maximizing tax deductions. If your total tax rate is less than 50%, then you’re coming out on the short end of the stick, and sometimes by a lot, explains Eric J. Nisall, founder of AccountLancer. “The earlier you are in the business lifecycle, and the lower your tax rates are, the more you give up by spending just to get a deduction.”

Let’s say your total tax rate is 30%. That means that for every $100 you spend, you “get back,” $30, points out Nisall. In other words, you’ll lose $70 in exchange for that $30. “That isn’t a good trade-off to me!” says Nisall. “Now, if you legitimately need to spend money, go ahead, but don’t throw away money unnecessarily.”

Consider Holding Off on Spending Until Next Year

Spending on expenses for the year ahead makes for poor advice and is actually backward thinking, explains Nisall. “If you’re a growing business, you might want to put off your business-related spending until the next year.

That’s because your net income will be higher, thereby putting you in a higher tax bracket. “By waiting until the following year to spend on non-urgent purchases, you’re giving yourself the additional deductions to offset that higher income, and hopefully will keep your tax rate lower.”

If you have questions, work with a tax professional who can help you come up with tax-savings strategies and maximize your tax deductions based on your unique situation.

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