The author is an Enrolled Agent, licensed by the Internal Revenue Service to practice before them. This article appeared in Inscriptions Magazine, an ezine for writers.
New Year is here and we’ve made various promises and resolutions. One of these may be to make an early start on gathering tax information so the Form 1040 will be completed and mailed well in advance of the April 17th (that’s right, two extra days this year) deadline.
Whether you take your taxes to a professional or prepare them yourself, it’s best to start early. If a refund is expected, file early and get your money. Uncle Sam doesn’t pay interest unless he fails to refund in a timely manner. If you expect to owe taxes, it’s still wise to prepare the forms early, and know what the liability will be. If you are underpaid (haven’t paid in 90% of current year tax or 100% of last year’s tax plus a few other scenarios), you’ll want to file as early as possible to reduce the penalty. If you won’t be penalized because you meet one of the exceptions, but will still owe, wait until the deadline to file and pay. No point giving Uncle your money in advance–he doesn’t pay interest on that either.
Home Office Deduction
For freelancers, one of the biggest changes in the rules this year makes it easier to claim a deduction for the business use of your home (or apartment). With the 1999 tax year, your home office will qualify as your principal place of business for deducting expenses if:
- It’s used exclusively and regularly for your business, and
- You have no other fixed location where you conduct substantial administrative or management activities of your business.
Exclusively is a key word in the concept of home office. Putting your desk and computer in a corner of your guestroom does not make the room a home office. You can section off a space in that room and claim the area of that space but an entire room cannot be claimed unless there is no other use of the room. Once the exclusive area is designated, it must be measured and the area compared to the area of your entire home.
The percentage can then be applied to those expenses incurred in the total operation and maintenance of your home. These include, but are not limited to:
- Mortgage interest (or rent)
- Insurance and taxes
- Depreciation (if you own your home)
- Repairs (e.g., heating or cooling system, exterior painting, etc.).
Other expenses that are directly related to the home office can be taken in full:
- Painting the office interior
- Repairing the office window, etc.
The most valuable benefit is that having a home office allows more deduction of automobile expenses. Without an office in the home, you’re unable to deduct the miles you drive from home to your first business stop of the day or from your last stop back home because that portion of your travel is considered non-deductible commuting mileage. When your home is your qualified business location, all travel is deductible. That’s .325 cents/mile for the first three months of 1999, .31 cents/mile for the remainder of the year.
Yot create a loss in your business with home office expenses but you can reduce your business income to zero. This not only reduces your income tax but will also reduce the self-employment tax. Expenses not claimed in a current year can be carried forward to next year.
Section 179 Expense Election
The purchase of business assets is generally not expensed in the year of purchase but is recovered over a useful life as carefully mandated by the Internal Revenue Service, e.g., five years for a computer, seven years for office furniture. The Section 179 Expense Election is provided to treat the cost of qualifying property as an expense rather than a capital expenditure. It can only be made in the year of purchase and on a timely filed return. In 1999, up to $19,000 of qualifying property purchases can be used to reduce income.
This amount is limited by the taxable income produced from any trade or business, including salaries and wages. While this means that if your freelancing is your only source of income, you cannot use the election to produce a loss, it also means that if you hold another job or had other income-producing property, e.g., a rental, the deduction is available to you up to the amount of income.
Medical Insurance Deduction
If you pay your own medical insurance premiums, there’s a sixty-percent adjustment to income available on Line 28 of Form 1040. The remaining forty-percent must be deducted on Schedule A with other medical expenses.
Professional Preparer vs. Self Prepared
Congress tells us with every new tax law they are simplifying our tax system. That may be the case for those taxpayers who have nothing but wages. It is not the case with those of us who are self-employed, have investments, receive pension benefits, redeem mutual funds, sell stocks or need to make estimated payments. There are a host of hidden deductions and items of income that the average taxpayer cannot be expected to know.
Tax preparers are hard-pressed to stay current on all the issues. If you choose to have your taxes prepared by a professional, choose with care. Most states do not require licensing in this profession and many dining room tables become tax preparation offices for a few months each year. Ask your preparer if he/she has completed continuing professional education this year; if so, how much. The cost of tax preparation is a deductible expense. A good understanding of the various tax laws can allow a preparer to save you the amount of the fee with reduced tax liabilities.