Tis the season to start filing your freelance taxes and there’s good reason not to dilly dally. The impact of the Tax Cuts and Jobs Act is no longer a coming attraction, and the reality of its effects are likely to be felt by many freelancers.
Specifically, some of the “regular” deductions that you may have claimed in the past have disappeared. Here are ten examples.
The new tax reform law increased the standard deduction on your 2018 tax return to $12,000 for single filers and married filers filing separately, $24,000 for married filers filing jointly, and $18,000 for heads of household. This is in lieu of the $4,050 in potential personal and dependency exemptions that used to be available.
While this amount is higher overall, there are many other deductions that you can no longer claim, so it may represent a change to your tax obligation. If this is the case, be sure to explore all possible tax credits and other deductions you may be entitled to.
Unlimited state and local tax deductions
You will only be able to claim $10,000 in deductions for state and local taxes. Depending on where you live, this could significantly alter your anticipated tax obligation.
A mortgage interest deduction of debt up to $1 million
On this year’s return, a deduction for mortgage interest is capped at $750,000 for any mortgage transacted after January 1, 2018.
If you transacted a mortgage prior to January 1, 2018 you can deduct the interest on the loan up to $1 million. If you don’t meet that maximum threshold amount and you have a home equity loan that you pay interest on, you may be able to deduct some of the expense to take full advantage of the mortgage interest deduction as described in the next point.
Unrestricted deductions for home equity loan interest
If you have a home equity line of credit that you pay interest on, you may have been used to deducting the interest on that loan regardless of what the money was used for. This is no longer a viable tax deduction through 2026 unless the loan is used to, according to the IRS, “buy, build or substantially improve” the home that secures the loan.
In addition, keep in mind that you can only deduct interest on the combined total of your primary mortgage and home equity loan up to the $750,000 threshold.
Deductions for unreimbursed employee expenses
If you freelance and are also employed (i.e. you received a W-2 this year), you can no longer deduct any unreimbursed purchases related to your job.
However, you can still deduct a wide range of qualified business expenses if they are incurred by your freelance business, so be sure to look into those deductions.
Other popular itemized deductions
In addition to the unreimbursed work expenses mentioned above, freelancers should take note that deductions for unreimbursed qualified employee education expenses, tax preparation and investment services fees, and professional dues are no longer available on your 2018 tax return.
Moving expense deductions
Unless you are an armed forces member, you are out of luck if you moved this year as far as a tax deduction goes. All moving expense tax deductions have been eliminated.
Unrestricted deductions for expenses related to natural disasters
If you were impacted by a hurricane, wildfire or flood in 2018, you will not be able to deduct any related losses that were not covered by insurance or another relief program on this year’s taxes.
For 2018 this deduction is only available if you reside in a presidentially designated disaster zone.
Alimony payment deductions
If you divorced in 2018 and made alimony payments you can still deduct them from your federal taxes on this year’s return. However, for any divorce finalized after December 31, 2018 this deduction is no longer be available.
Don't miss out
Given the number of popular deductions that are no longer available this tax season, it is wise to check in with a tax professional to make sure you aren’t missing any of the new tax deductions that the TCJA ushered in. We’ll take a look at them, including the potential 20% tax deduction for pass-through businesses in our next post.
In the meantime, you should have most of your tax documentation in hand, so don’t delay making plans to file your 2018 taxes and expedite any refund to which you may be entitled.
Jonathan Medows is a New York City-based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com — which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available March 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.