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Tax Deductions for the Self Employed

By Eric Bank

As a self-employed person, you are responsible for paying estimated income taxes. However, you receive benefits from a galaxy of tax deductions not available to employees. These include:

  • Access to a single-person 401K

  • Depreciation

  • Educational/professional fees and expenses

  • Home office expenses

  • Long-term-care and medical insurance premiums

  • Meals on the job

  • Supplies and equipment

  • Transportation expenses

Let’s begin this series with details about two important tax deductions, home office expenses and health insurance.

Home Office Expenses

Many self-employed taxpayers start out running home-based businesses. For tax reasons, you must maintain full and proper records of expenses arising from use of a home office. You can deduct these expenses if you satisfy two requirements:

  1. You exclusively and regularly utilize a portion of your home to run your business. This might consist of a spare room or a part of a room. The office space can only be used for your business, with the exception of areas used to store inventory.

  2. Your home office must be your primary business venue. You can work away from your home and still get the deduction if you satisfy the first requirement. For instance, if you are an acupuncture therapist, you might have a facility set up at home, but you might also make house calls.

Normally, you deduct home office expenses based on the percentage of total square feet dedicated to your business. This is also true for stand-alone structures on your property, including a barn, garage or studio.

Here are two primary methods for calculating you home office expenses:

  1. Regular Method: A somewhat complicated computation that includes your actual home-office expenses, including a pro-rated portion of property taxes, mortgage expenses, utilities, insurance, depreciation and repairs, all based upon the relative size of the office to the home.

  2. 2.jpgSimplified Method: The IRS responded to complaints by allowing an easier calculation, in which you multiply the office’s square footage by a set rate of $5 per square foot. This method substantially cuts your bookkeeping tasks, but is restricted to 300 sq. ft., meaning that the biggest allowable deduction is $1,500.

Health Insurance

Self-employed taxpayers can deduct all health insurance premiums, including policies covering dental care. You can also deduct some premiums charged for a qualified long-term care insurance policy. The LTC premiums you may deduct are based on your age:

  • 40 or younger: $370

  • 41 - 50: $700

  • 51 - 60: $1,400

  • 61 - 70: $3,720

  • 71 or older: $4,660

An LTC policy is considered “qualified” if it is renewable, provides refunds to increase future benefits or reduce premiums, does not have a cash surrender value, and does not reimburse expenses paid by Medicare. The LTC policy must pay for qualified long-term care services, including those that are preventative, diagnostic, palliative, and curative.

You can take a tax deduction for the health insurance premiums that cover your spouse and dependents, as well your children who are under age 27 but aren’t your dependents. This includes adopted and foster children, as well as stepchildren.

Frequently Asked Questions