The April 15th tax deadline is Monday and people are stressed out.
Maybe you’re unsure if you provided all of the necessary information to your tax preparer to lower your tax liability. Or perhaps your tax preparer hasn’t asked you enough questions to give you confidence that they are helping you save money.
Don’t worry, I’m here to help and provide you with 5 of the most overlooked tax deductions.
- Self-employment health insurance
If you are paying health insurance for either yourself or you and your family, your premiums may be tax deductible. Health insurance on the Marketplace can be expensive, so make sure you claim this as an adjustment to income on your tax return. In order to take this deduction, your business has to have a net profit. That means after all of your expenses, if you made a profit you can take this deduction.
- Home Office Deduction
When you hear people talking about how to write off your mortgage or rent, they are using the home office deduction. If you have a dedicated work space in your home, here’s what you need to do:
Calculate the square footage of the office and divide it by the total square footage of your home. For example, if your office is 300 square feet and your home is 2,000 square feet, your office represents 15 percent of your total space.
You can deduct 15 percent of your mortgage interest or rent, electricity, gas, internet, alarm system, trash pickup, housekeeper—whatever costs you incur for maintaining your home that also benefits your business.
If you don’t want to do the math, you can use the simplified method which allows you to take $5 per square foot. If your office is 300 square feet, multiply that by $5 and you can deduct $1,500. $1,500 is the maximum deduction you can take using the simplified method.
Two things to note: Your business must have a net profit before you take this deduction and taking the deduction cannot push your business into a net loss. If you have a net loss, you can still claim the expenses on your tax return. It will be carried forward to future years and used when your business has a net profit.
- SEP IRA
Leveraging the SEP IRA is one of the best ways to save for retirement as an entrepreneur. You’ve probably heard of paying yourself first. The SEP IRA is where you pay yourself last. That’s because most people make the contribution when they file their taxes. Why do they wait? Your contribution amount is based upon your net self-employment income for the year and most people don’t know the final figure until they prepare the tax return.
For 2023, you can contribute up to the lesser of 25 percent of your net self-employment income or $66,000.
Here’s an example: Let’s assume your net self-employment income was $100,000 after all of your expenses, you can contribute a little over $18,000 to a SEP IRA. If you invest that money in the stock market earning a 7 percent average annual return, in 20 years you will have almost $70,000!
Investing in your future by leveraging the SEP IRA will save you $4,000 in taxes for 2023.
Please note that you must identify your contribution amount and make the contribution by April 15, 2024–even if you plan to file an extension.
- Depreciation of rental properties
If you’ve been preparing your own tax return and have a rental property, make sure that you are depreciating the property. Depreciation is a phantom expense because you don’t actually pay it.
To depreciate a rental, you have to determine a value. Be sure to get your tax preparer involved to be sure it’s done correctly. I won’t bore you with the calculation, but let’s say you determined the depreciable value of the building is $400,000 (you can’t depreciate land).
If you depreciate the building over 27.5 years you just found $14,000 of additional expenses to offset your rental income.
- Travel expenses for rental properties
You should check on the status of your rental properties at least once a year to make sure the property is safe and in good condition. If your rental property is out of state or better yet in some warm tropical climate like Mexico, this should be a welcomed trip. From the moment you leave your home to the time you return home, the entire trip is tax deductible.
If your property is local, you can deduct the mileage to and from the property. You can also deduct meals and overnight hotel stays, if needed.
This is one of the reasons people recommend getting rental properties in destinations you want to vacation. Because if you time it right, the entire trip can be a write off!
Tax season is the opportunity to tell your tax story. Make it as complete (and honest) as possible.
If you were surprised with a tax bill of $30,000 or more this year, I guarantee you are not maximizing at least 1 of 4 tax strategies the top 3 percent of taxpayers are using that will save you thousands of dollars. If you would like to learn more about these strategies and get a tax assessment with your blueprint on how to save money in 2024, schedule a meeting today at https://calendly.com/averewealth/exploratory-call.
