Self-employed? Do this now to cut your taxes
The time for moves that can help lower the taxes you’ll owe for 2016 is ticking away.
Those moves include what you can do now in anticipation of Donald Trump’s proposed tax plans and how you could benefit from making extra donations to charity before year-end.
But the taxpayers who have the most flexibility to do things now to create big-time tax savings are those who report some or all their income from self-employment. That’s because you have more control over the timing of when you receive income (for instance, by delaying sending invoices until January), and you can pay additional expenses before year-end.
Expenses to operate a sole proprietorship are deductible right on Schedule C, which reduces the income reported as net profit. That lowers income subject to federal and state income taxes, and it reduces income subject to the self-employment tax, which is an additional15.3 percent levy over your federal and state income tax.
So if your federal marginal tax rate is 33 percent, your state tax rate is 7 percent and the self-employment tax is 15.3 percent, paying an additional $10,000 of expenses this year could result in a $5,530 lower tax bill.
Here are some tax planning moves to consider making now if you’ll be reporting income from self employment.
Rent: Most landlords require rent to be paid by the first of the month. Since that’s just two weeks away, consider sending the rent check for January now, so you can claim that as an additional deduction for this year.
Health insurance: Similarly, make your January premium payment now to increase this deduction for 2016. Also, if you have a high-deductible health plan, you’re allowed to contribute to a Health Savings Account. Such contributions are allowed as an above-the-line deduction on the front of your tax return. The contribution limit for 2016 is $3,350 for individuals and $6,750 for marrieds. If you’re 55 or older in 2016, add an additional $1,000 to these limits. Another bonus: Money taken from an HSA is tax-free when used to pay for qualifying medical expenses.
Retirement plan contributions: One of the best tax-saving moves for people reporting self-employment income is to contribute to a self-employed 401(k) account. The catch is that the account must be established before year-end, but you can wait until tax-filing time to actually make the contribution. With year-end approaching, get the application paperwork prepared and send it in to your broker, bank or investment firm now. During this hectic time expect processing delays.
Office supplies: It’s time to stock up on paper, printer toner or other office essentials. Also buy additional postage for next year now.
Office equipment: If you’ve been thinking about upgrading your computer, buying a backup power supply or that new stand-up desk, now’s the time. There’s a special category allowing deductions for office equipment called Section 179, and the upper limit for items purchased that qualify for this deduction is an astonishing $500,000 per year.