Contributed by: Rachel Cottam
Tax season can be stressful, but it’s worth it when Uncle Sam gives you a big refund. Unfortunately, many U.S. taxpayers leave too much money on the return table—and you might be one of them.
Understanding the best ways to prepare taxes and knowing which tax write-offs you’re missing will help you avoid this costly mistake.
Just remember: if you are going to claim any deduction, you need to have records. Don’t try to claim write-offs you have no proof of. Keep pristine accounting books and physical or digital documentation of all relevant receipts. Even if you’re handing your taxes off to a professional, they’ll need a paper trail.
If you work as an independent contractor or are self-employed, you can itemize deductions using a Schedule C (Form 1040).
Here are a few tax write-offs you may not be taking advantage of:
If you have a vehicle that is solely used for business (like a truck or delivery car), you can deduct mileage costs. As of January 1, 2018, the standard mileage deduction is $0.545 per mile. Some self-employed individuals will choose to deduct their actual outlays instead, but you are legally allowed to deduct the standard mileage rate even if your actual costs are lower.
If you have a vehicle that you use for both business and personal needs, you can only deduct business-related costs. Local commuting costs are nondeductible.
Half of the self-employment taxes you pay can be deducted. These write-offs include Social Security and Medicare taxes.
State Licensure Fees
The amount you pay each year to your state or local governments for business licenses can be written off. This includes annual regulatory fees. However, fees paid to get initial licensing are not deductible.
Home office expenses can be deducted if the space is used exclusively for business. If your home office is also used as a guest bedroom or for kids to do homework, you may not qualify for this write-off. The space must also be your principal place of business and where you meet with customers.
You’ll need to calculate what percentage of your home the office takes up. You can deduct electricity, heat, mortgage and other utility costs that apply to this percentage.
Supplies and materials that are purchased in association with your work are also fully deductible.
Small Business Deductions
Many of the self-employed deductions can also apply to small businesses. Things like office supplies and travel expenses are transferable. However, the home office deduction only applies to self-employed individuals, not salaried employees who work from home.
There are a few other small business write-offs that are sometimes overlooked:
If you recently started your business, you can deduct up to $5,000 in qualifying startup costs and up to $5,000 in organizational costs. This includes any costs incurred before you opened your doors—advertising, training, transportation, consultant fees and more.
If your total startup costs exceeded $50,000, your allowable deduction will be reduced.
Small businesses are often considered pass-through businesses (an organization that is not taxed at the corporate level, such as S corps and most LLCs). The recent Tax Cuts and Jobs Act allows you to deduct up to 20% of your business income, helping you save on taxes.
Losses on Bad Debts
If someone owes you money that you can’t collect, you may be able to write it off come tax season. According to the IRS, bad debts include any amount that you’ve taken reasonable steps to collect for a reasonable period of time, but have not received.
In this sense, unpaid accounts receivable may be deductible expenses.
Many small business owners forget that they can deduct the costs of recruiting. This includes money spent towards placing a job ad or purchasing a booth at a career fair.
While some choose to take the standard deduction on personal tax forms, it can also be worth itemizing if you have some of the following expenses:
If you, your spouse or a dependent have unreimbursed medical costs, you can itemize these deductions. Medical expenses must exceed 7.5% of the taxpayer’s adjusted gross income to apply. (For 2019 income, the limit will revert to 10%).
If you have contributed to an HSA, you can claim a tax deduction for your contributions (even if you don’t itemize). The HSA contribution limit is currently $3,450 for individuals and $6,900 for families.
Any employer contributions to your HSA are not deductible.
If you incurred mileage costs for volunteer work (e.g. delivering meals to the elderly), you can also deduct $0.14 per mile.
Most or all of the interest you pay on your mortgage can be written off. If you purchased a home after December 15, 2017, you can deduct mortgage loan interest on a loan up to $750,000. If you purchased a home before that time, the loan limit is $1 million.
Mortgage insurance, however, is no longer deductible. Additionally, if you paid interest on the loan, but used it for personal expenses, that amount is now nondeductible.
If you are a member of the armed forces and have to relocate, you can deduct your unreimbursed moving expenses. While moving costs used to be deductible for everyone, this write-off now only applies to active military.
If you claim dependent credits on your tax forms, you will receive $2,000 for child dependents and $500 for non-child dependents.
Additionally, you can deduct up to $3,000 paid to care providers for children under 14 ($6,000 for two or more children).
State and Local
Deduction options vary by state, so be sure to check in with your local offices. The total deduction for state and local taxes is now capped at $10,000.
Standard vs Itemized
The decision to take the standard deduction or itemize is highly personal. However, the recent tax bill eliminated many itemized deductions and actually increased the standard amount. Likely, more than ever, people will be opting for the standard.
In fact, TurboTax estimated that nearly 90% of taxpayers will now take the higher standard deduction instead of itemizing—up from 70% last year.
Still, it’s always worth it to crunch the numbers and consult your CPA, so you don’t leave any money on the table.
About the Author: Rachel Cottam is the Content Manager at ZipBooks and a former high school English teacher. Her writing and editing have been featured in academic journals and tech websites alike.