With the holidays right around the corner, the tax year is almost over. Taxes are never fun to think about but these year-end tax tips for the self-employed could really help you save on your tax bill.
Know The New Tax Law
The new tax law went into effect in 2018. Make sure you know how this could impact you and your tax bill. Some things to consider:
- The tax rates and brackets have changed from 2017. Most tax rates have gone down.
- The standard deduction has increased to $12,000 for a single taxpayer or $24,000 for married, joint filers.
- Itemized deductions have changed. One of the most significant changes is the new $10,000 limit on state and local taxes
- The mortgage interest deduction has changed for mortgage debt used to purchase homes after December 14, 2017.
- Many small business owners and the self-employed may write off up to 20 percent of their income with the Section 199A deduction.
Be sure to work with your tax pro on understanding the new tax laws before filing your tax returns.
Maximize Your Tax-Advantaged Accounts
Your retirement savings account offers many tax advantages. Retirement accounts for the self-employed add some complexity compared to a W2 worker. But, the tax savings can be pretty substantial.
You can deduct your contributions to a SEP IRA and the distributions are taxed as income. You can contribute as much as 20 percent of your net income, not to exceed $55,000.
You can use a traditional or Roth IRA to contribute up to $5,000 (plus $1,000 catch-up contribution for those 50 or older). You can deduct your traditional IRA contributions but not your Roth IRA contributions. Roth IRA withdrawals in retirement face no taxes. These retirement vehicles have income limitations, though.
The One-Participant 401(k) plans, often called a Solo 401(k), allow the self-employed to contribute up to $55,000 in 2018 or 100 percent of your earned income (whichever is less). This can go a long way toward reducing your taxable income.
Consult your tax pro on what’s the best tax-advantaged retirement account for you.
Defer Payments Until 2019
The 2019 tax brackets have changed slightly. It’s not as dramatic as the change from 2017 to 2018 but it’s enough to potentially want to defer payments until next year. That will put those earnings on the 2019 tax year instead of the 2018 tax year.
Maximize Your Deductions
While there are many changes to the tax code, one thing remains for the self-employed: your business deductions are still extremely valuable.
You can still deduct nearly all your business expenses. In fact, the new law includes increased bonus depreciation for certain expenses like computers. You can also still deduct 50 percent of the meal and beverage costs if they’re related to business.
Your miles are still very valuable in 2018. You can write off 54.5 cents for every business mile in 2018. Make sure you’re using a mileage-tracking app like MileIQ to create a compliant mileage log.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.