End-of-year tax deductions you can't afford to miss
It’s a great feeling to be able to help others — and it’s even better if you get some added benefit, too. This is the kind of win-win situation that the Taxpayer Certainty and Disaster Tax Relief Act of 2020 made possible by allowing taxpayers to deduct up to $600 of charitable contribution, regardless of whether they itemize their taxes or not.
What does it mean for year-end freelance taxes? Essentially, this new law made it easier to deduct up to $600 in donations to qualifying charities on your 2021 federal income tax return. This applies even if you don’t itemize your freelance taxes, which is what makes this provision different than in the past when it would be necessary to itemize in order to claim charitable deductions.
There are some key thresholds to note:
· For individual tax filers, including if you are married filing separate returns, you can claim a deduction of up to $300 for cash contributions made to qualifying charities during 2021.
· The maximum deduction is increased to $600 for married individuals filing joint returns.
What type of charitable contributions qualify for the deduction? According to the IRS, “Any cash contributions including those made by check, credit card or debit card as well as amounts incurred by an individual for unreimbursed out-of-pocket expenses in connection with their volunteer services to a qualifying charitable organization” will qualify. However, keep in mind that cash contributions don’t include the value of volunteer services, securities, household items or other property.
In addition, be sure that you are donating to a recognized charity, otherwise you can’t claim the deduction. To check the status of a charity, use the IRS Tax Exempt Organization Search tool.
Other exclusions to this rule to be aware of: contributions made either to supporting organizations or to establish or maintain a donor advised fund. Contributions carried forward from prior years do not qualify, nor do contributions to most private foundations and most cash contributions to charitable remainder trusts.
Make sure you obtain and retain a receipt for your contribution. Be aware that before claiming a charitable contribution deduction, you’ll need to have a receipt. Usually, this includes obtaining an acknowledgment letter from the charity, and you should also retain a canceled check or credit card receipt for contributions of cash.
Beyond charitable contributions, you may be able to take advantage of these year-end freelance tax deductions:
Measure up your home office. If you work at home, like many freelancers do, calculating the size of the space you use exclusively for business and claiming $5 for each square foot (to a maximum of 300 square feet) on your tax return can save you money. This is the simplified home office deduction allowed by the IRS, which encompasses deductions and the business expenses associated with your office space, such as rent, mortgage, and utilities.
If your home office is larger or your associated expenses are higher, you can opt instead for the regular method, which requires you to track your actual expenses such as utilities, mortgage payments, rent, home repairs, home depreciation, etc., and then calculate your deduction based on the percentage of your home devoted to business.
The key to claiming this deduction is that the area of your home you claim must be used solely and regularly for the purposes of trade or business. This generally means that you have a separate room or space in your home that is clearly defined as an office.
Additional supplies, office furniture, or new technology. The end of the year is the perfect time to make investments in these areas and use the expenses as a deduction on your 2021 taxes. For start-ups, you could also elect to use the bonus depreciation deduction, which allows for an immediate first-year deduction on the purchase of eligible business property. This is a method of accelerated depreciation which allows for an additional deduction of 100% of the cost of qualifying new property in the year in which it is put into service in the tax years 2017-2023.
Advertise your business to set the stage for a successful 2022. Spending on end-of-the year marketing now can help your business grow next year. Marketing-related deductions you may be able to take, especially in the last few months of the year include updating your website, doing an email marketing push, or designing a new logo.
Pay your estimated taxes now. While your fourth quarter estimated taxes aren’t due until January 15, if you pay them before the end of the year you can deduct the expense and potentially lower your tax obligation. Tax reform limited the state and local tax deduction to $10,000 for non-business taxes but certain state and local governments have separate business taxes that are not limited. These taxes are reported as business expenses.
Be strategic on collecting payments. Be aware of where you are in the income tax brackets and be sure to accelerate or slow down collections based on this information. If you are going to be in a higher tax bracket, try not invoicing clients until late December so the payments aren’t collected until 2022.
Retirement contributions. Contributing as much as possible to a qualified retirement account such as a solo 401(k), SEP IRA, or an individual retirement account (IRA). This will allow you to defer the taxes on these monies and also save for retirement.
Evaluate your business structure. If you own a business and you haven’t changed your entity type for several years, you may want to consider if another entity type may offer you tax advantages. This is one tip that should likely be done in concert with a tax professional so that you are certain that any entity changes you make will be beneficial to you.
Show your clients some appreciation. Another expense you can deduct from your 2021 freelance taxes, if you make it before December 31, is that related to business gifts. If you purchase gifts for clients during the holidays, you will be able to deduct up to $25 per person this tax year. You could also take them out for a nice meal if they are in the same area — as long as the meal is at a restaurant and substantive business is discussed, you can deduct 100% of the expense for the 2021 tax year. This is another bumped-up deduction bonus from the IRS related to COVID relief.
With the holiday season just around the corner, now is the time to consider making a tax deduction or putting in place some of the other deductions noted above. In most cases, they can, dollar-for-dollar, reduce your tax bill come tax season 2022, while providing benefits to others and potentially your business, too.
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 provides tax, accounting and business articles for freelancers on his website, http://www.cpaforfreelancers.com, which also features a free newsletter, blog and a comprehensive freelance tax guide.