Tax-time has a tendency to bring on the angst. This can happen even if year after year you have the same tax situation and file the same way. Now, imagine if you had several big life changes in one year. Life changes mean tax changes.
Kelly and Dustin Dellinger have made quite a shift. Both started working for themselves in 2011, building a new business, and had their first child, Gavin.
Let’s start with the addition of the little one: For the family’s filings this year, they’ll be able to take an exemption for having a new dependent, which is $3,700 for 2011. Also, for each qualifying child under the age of 17, there’s a child tax credit of up to $1,000. This tax credit starts to phase out for joint filers with income at or above $110,000. The Dellingers also may be able to claim a child-care credit for the childcare help they have while they’re working.
Now that Kelly works part-time for herself as a retirement planner and Dustin has a radio studio, they’ll have to get used to paying their own taxes, usually quarterly. These can be some big checks. But reducing that bite are the various deductions you can take when you work for yourself, especially if you’re incorporated.
First, there are many deductions they can take for working in the home. For example, if you have a full-time home office, as the Dellingers do, you can deduct a portion of your mortgage, rent, property taxes, utilities and, insurance. Keep in mind, however, that the self-employed tend to get audited more often so home office deductions need to be backed up with solid documentation.
The Dellingers also pay for their own health care coverage which, along with other medical expenses—big this year with the new baby—add up to a substantial annual deduction. Remember, unlike filers employed full-time, the self-employed aren’t required to have healthcare deductions add up to 7.5% or more of adjusted-gross-income (AGI) before claiming the deduction.
Other partial deductions allowable when you have your own business include entertainment and meal costs, which for the Dellingers includes entertaining in the studio at home, as well as travel costs and equipment. Don’t forget to also deduct Internet and phone services if you use them for business as well.
Kelly and Dustin haven’t started their own retirement savings plan but they will now as they found that one of the biggest deductions of all if you’re self-employed is one that helps you twice—contributions to your simplified-employee pension fund, your SEP, or a solo 401(k) or Keogh. A SEP is a self-employed or small business owner IRA and for 2011, you can contribute up to 20 percent of your net self-employment income for the year and claim it as a deduction.
If you have tax tips or a question, head to @carmenwongulric, #OnFile. For Yahoo! OnFile, I’m Carmen Wong Ulrich.