The Most Common Tax Deductions

Do you have a small business or a thriving freelance side hustle? If you’re self-employed in any capacity, you can legally deduct all legitimate business expenses. That includes:

• Communications expenses: Your business cell phone bill and your Internet expense may be deductible.
• Supplies: Printer ink, paper, pens, and other costs associated with running the business.
• Advertising: Your website, business cards, and any ads you run may count as business expenses.
• Business-related travel: Did you attend industry conferences or visit customers to complete a sale? These costs are deductible (including 50% of all meals eaten out during travel).
• Tangible property: Did you buy a cell phone, tablet, or computer for your business? If so, you can either depreciate these assets over time, or, in some cases claim the full cost as an expense the year that you buy it.
• Legal and accounting fees: Do you pay an accountant or bookkeeper (or pay for accounting software)? If so, be sure to deduct the expenses.
• Mileage expenses: Does your side hustle involve driving a car? If so, you can claim $0.58 per mile driven related to the expense. The trick with this deduction? You have to track your mileage throughout the year. These are the top apps for tracking your mileage.

Optimizing your business expenses is critical for minimizing your taxes. As a self-employed person, you have to pay 15.3% of your profits toward Social Security and Medicaid. Plus, you have to pay Federal, state, and city taxes on that profit. Every dollar you can legally claim as an expense will save you anywhere from $0.15 to $0.50 or more in taxes.

But the key to saving this money is tracking the expenses throughout the year. Use an app or bookkeeping software to track expenses and income. Keeping your business finances organized also has the added advantage of making it easier to estimate your quarterly taxes as a freelancer.

By the way, if you’re completely self-employed you may be able to claim your health insurance premiums as an adjustment to income (it lowers your expenses). Be sure to talk with an accountant to understand all the costs that may be deductible.

If you contribute money to a traditional IRA, or a workplace retirement plan such as a 401(k), 403(b), 457, or a self-employment plan (Individual 401(k) or SEP-IRA), these contributions can be made with pre-tax dollars. When you withdraw the money, you’ll have to pay income tax on them, but in the meantime, these contributions can help lower your tax bill.

When you combine the tax savings with the possibility of employer matches, retirement contributions become the ultimate in wealth-building tax deductions. If you’re self-employed, be sure to open your retirement account before the end of the year. You can contribute to it until the April 15th tax filing deadline.

Make sure you also keep up with the contribution limits:

• IRA Contribution Limits
• 401k Contribution Limits

Do you have student loans? If you’re paying interest on them, you may qualify for an “above-the-line” deduction of up to $2,500. An above-the-line deduction means you don’t have to itemize your deductions to qualify for this. You simply claim the deduction on your tax form (Form 1098-E), and your taxable income is lowered.

The Earned Income Tax Credit is a “refundable” tax credit that helps working Americans who have low income lower their tax burden or even boost their income (essentially through a negative tax).

The maximum credit amount is:

• $6,557 with three or more qualifying children
• $5,828 with two qualifying children
• $3,526 with one qualifying child
• $529 with no qualifying children

In years when you have a low income (for example, the first few years of college or when you’re starting a business) you may qualify for this credit.

A quick note on income: This is your adjusted gross income. So if you’re a super saver who contributes a ton of money to retirement accounts, you may qualify for this tax credit even if you’re earning a decent salary.

Going back to school? If so, you may qualify for the lifetime learning credit. This credit allows you to have a dollar-for-dollar credit for up to $2,000 of educational expenses per year.

You can claim this credit if your modified adjusted gross income is less than $57,000 (filing as a single person). If you earn between $57,000 and $67,000, you will qualify for a partial credit. For married couples filing jointly, the required income is less than $114,000 with a phase-out credit between $114,000 and $134,000.

If you’re a lower-income earner who contributes to a retirement plan (including a Roth IRA, a traditional IRA, or any workplace plan), you could get a credit worth 50%, 20%, or 10% of your contribution up to $2,000 worth of contribution (so a maximum credit of $1,000). (Double the numbers for married couples who file a joint return.)

This is another one of those amazing credits for super savers who have a moderate gross income, but sock away a ton in retirement accounts.

As long as you’re not a full-time student, over 18, and can’t be claimed as a dependent (and of course, you make retirement contributions), this credit can be yours.

It is up to you to keep track of any deductions you qualify for.

I recommend using a bookkeeping software program or an app to track your income and expenses associated with self-employment income. Be sure to upload pictures of your receipts so you don’t have to keep a literal shoe box with your expenses.

I also recommend keeping a “tax file” where you can store receipts from medical expenses, educational expenses, and debt repayments. Come tax time, it should be fairly easy to figure out your deductions.

Tax software makes it easy to claim deductions when you’re filing taxes. There is no reason to use pen and paper when you can use free or low-cost software to file your taxes.