A Quick Guide To Itemized Deductions 

As we all know, careful tax planning can help you maximize your deductions. When preparing your taxes, itemizing deductions may be one way to significantly lower your tax liability.

Read on to find out if the itemized deduction is the way to go for you, and learn when and how to itemize your deductions to really maximize your tax savings.

What are itemized deductions?

Essentially, itemized deductions are deductible expenses approved by the IRS that can lower taxable income. By choosing itemized deductions, you’re able to pick and choose from a huge range of individual tax deductions out there instead of taking the flat-dollar standard deduction.

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What are the different types of itemized deductions? 

Itemized deductions cover a variety of expenses that are only deductible when you choose to itemize. 

Listed below are seven of the most common itemized tax deductions.

1. Home mortgage interest deduction (HMID)

According to the Tax Cuts and Jobs Act (TCJA), homeowners can deduct the interest paid on up to $750,000 in mortgage debt if they took out a mortgage after December 15, 2017 (before this law was passed, you could deduct up to $1 million.)

2. Charitable contributions

How you can deduct from a charitable contribution depends on the type of asset donated and the charity organization you donate to. Remember, not every recipient charity organization is qualified under the tax law, so make sure to check if you’ve donated to approved tax-exempt charities carefully. 

Here is a useful link to help you do your research: 

3. IRA contributions deduction

Your contributions to a traditional IRA are deductible. However, this isn’t the case for contributions to a Roth IRA. 

Your eligibility for IRA contributions deduction is determined by your filing status, income, Social Security eligibility, and access to a workplace retirement plan. You can contribute up to $6,000 and deduct it from your taxes in 2021 and 2022, and if you’re 50 or older, you can add another $1,000 to that.

4. Medical expense deduction

As of 2021, you can deduct only eligible, unreimbursed medical expenses that exceed 7.5 percent of your adjusted gross income (AGI). For example, if your AGI was $60,000, you wouldn’t be able to deduct any amount lower than $4,500 in eligible medical expenses.

Some common examples of non-deductible medical expenses are those that are covered by your insurance or employer. Aesthetic operations are also generally unapproved by the IRS. Nonprescription medications (excluding insulin) and other purchases for general health, such as toothpaste, health club dues, vitamins, diet food, and nonprescription nicotine products, are normally not deductible. Medical expenses paid in a previous year are likewise not deductible.

For a complete list of tax-deductible and non-deductible medical expenses, check out IRS Publication 502

If you have clicked the link and feel unmotivated by the long texts, don’t worry! The IRS has created a free tool for you to check if your medical expenses are deductible.

5. State and local taxes deduction (SALT)

The state and local tax (SALT) deduction allows taxpayers who itemize their federal tax returns to deduct certain state and local taxes. Property taxes plus state income or sales taxes, but not both, are capped at $10,000 per year under the Tax Cuts and Jobs Act (TCJA). However, it’s only $5,000 total if you are married and filing taxes separately.

6. Rental property tax deductions

Apart from the obvious profit that your rental property may bring, you can also deduct the expenditures of owning, running, and maintaining the property on your tax return. 

For instance, a popular rental property tax deduction is the allowance for depreciation. You can properly deduct that depreciation every year over the total useful life of your rental assets. However, the math is usually complicated, so it’s best if you can seek professional advice. 

Furthermore, only when your rental property fits the following criteria will you be able to depreciate your property:  

  • The property is yours. 
  • You use the property for your business or to generate income. 
  • The property has a determinable useful life
  • You anticipate the property lasting longer than a year. 
  • The property was not put into operation and was later disposed of (or no longer utilized for business) during the same year. 

7. Student loan interest deduction

The maximum interest deduction for student loans is $2,500. If your adjusted gross income is beyond $80,000 — or $165,000 if married filing jointly — you can’t take the deduction. 

Unlike most other deductions, the student loan interest deduction is claimed as an adjustment to income on Form 1040. This means you don’t have to fill out a Schedule A, which is used to itemize deductions, to claim it.

There’s also a free tool provided by the IRS to help you figure out how much student loan interest you’re eligible to deduct. 

How can I claim itemized tax deductions? 

It’s quite simple to claim itemized tax deductions: you just need to fill in your income taxes using Form 1040 and list your itemized deductions on Schedule A

Firstly, file all your expenses on the appropriate lines of Schedule A, figure out the total of your itemized deductions then copy that number to the second page of your Form 1040. You then will be able to know your final taxable income by subtracting the deductions from your income.  

What type of receipts do I need to keep for itemized deductions?

If you opt to itemize your expenses, the IRS requires you to keep supporting documentation to prove that you did spend those expenses for the purpose you claimed on your tax return. This is because if the IRS has any suspicion regarding your tax claim, they would need those records to find out whether your filing was honest or not. 

While the IRS doesn’t specify exactly which receipts you must keep, you should keep every record that can serve as concrete evidence of purchase, from sales slips and invoices to deposit slips and canceled checks.

A smart way to organize your receipts 

Itemized deductions can save you a lot of money from Uncle Sam, and it’s important to do your taxes correctly in the event of an audit. 

If you’re tired of spending hours and hours collecting and categorizing receipts by yourself, we’re here to tell you there’s a super easy alternative to that. It’s Shoeboxed. 

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

How to File Taxes as an Independent Contractor: A Step-by-Step Guide

If you work as a freelancer or self-employed person, you likely get paid as an independent contractor rather than an employee. This kind of work affects the way you file and pay your taxes. You’ll have extra responsibilities, file additional forms to make sure you’re paying the government enough during the year, and pay a self-employment tax. 

It’s important to understand independent contractors’ taxes correctly so you won’t get slapped with fines and penalties by the IRS. This article will give you an overview of independent contractors’ taxes and a step-by-step guide on how to file as an independent contractor. 

What is an independent contractor?

An independent contractor refers to a person, business, or corporation that provides products or services under a written contract or a verbal agreement. Unlike employees, independent contractors do not work for an employer on a regular basis but rather on a project-by-project basis, when they may be subject to the agency’s laws.

The key characteristic of an independent contractor is the ability to retain control over the work they’re being paid to complete. According to that guideline, there is a wide range of careers that allows you to work as an independent contractor, including, but not limited to:

  • Freelance accountants or bookkeepers
  • Freelance writers
  • Virtual assistants
  • Hairstylists
  • Lawn care providers
  • Physicians
  • Dentists
  • Mechanics
  • Carpenters
  • Manicurists 
  • Personal trainers
  • Therapists

You may qualify as an independent contractor regardless of your business’s structure. For example, you could be considered an independent contractor if you work as a sole proprietor, form a limited liability company (LLC), or a corporation. In short, you can be considered an independent contractor as long as you’re not classified as an employee. 

Note: If you run a small business and hire people to work for you, you’ll have to classify them as independent contractors or employees. Misclassifying an employee as an independent contractor could trigger an IRS tax penalty

How to file taxes as an independent contractor

Before you start gathering paperwork and crunching the numbers in preparation for tax season, you need to be sure if you need to file taxes. In the US, you’ll only need to file a tax return if your annual net earnings as an independent contractor total more than $400. 

Filing independent contractor taxes will take different steps depending on your business structure. However, they generally share the same steps in common that you need to follow.  

Specify tax deductions for independent contractors

As an independent contractor, you may be eligible for certain deductions for both business and personal expenses. Those deductions can significantly lower your taxable income for the year, so be sure to save these kinds of receipts:

  • Business travel, accommodations, and meals expenses
  • Marketing and advertising expenses
  • Gas, car mileage, and other vehicle-related expenses
  • Equipment purchases
  • Rental or lease payments
  • Home office expenses, including mortgage and property taxes
  • Self-employment retirement plan expenses
  • Business insurance 
  • Phone and internet bills
  • Legal expenses

Independent contractors can also claim a deduction for out-of-pocket health insurance premiums. This deduction includes medical, dental, and long-term care insurance premiums. You may also be eligible to deduct the expenses for your spouse’s and children’s insurance. However, there is an exception that if you have access to a spouse’s insurance plan, you can’t deduct health insurance premiums.

Other independent contractors’ deductions include mortgage interest, student loan interest, and real estate taxes. An independent contractor can also get a tax break for contributing to a self-employed retirement plan or a traditional IRA (Individual Retirement Account.) 

Fill out essential tax forms for independent contractors

There are hundreds of IRS forms when it comes to filing taxes. Fortunately, as an independent contractor, you only need to focus on a couple of essential documents. Let’s take a closer look at the essential records that an independent contractor needs to complete for tax season:

  • Form 1040: Both traditional employees and independent contractors must complete and submit Form 1040 before the tax deadline each year. This form records the details and specifics of your gross income and calculates how much you owe Uncle Sam or how much of a refund you can get back.
  • Schedule C: You need to submit this form together with your Form 1040 if you work as a sole proprietor or are the only owner of an LLC. You’ll have to provide precise details regarding your income, mileage records, inventories, and business expenses in this form. 
  • Schedule SE: This document helps you determine the amount you owe in self-employment taxes based on your net income for the year.  
  • Form 1099-MISC: While Form 1040 and Schedule C are the paperwork you submit to the IRS, Form 1099-MISC is the document you receive from clients you’ve done business with throughout the year. It’s a record of the payment you received from the companies who hired your services.

Set up a practical timeline to pay your taxes

Now that you have a better understanding of what is an independent contractor and how to file taxes as an independent contractor, let’s make your tax-filing process more efficient with a practical timeline. 

  • Keep track of your business expenses and earnings 

An independent contractor usually works with many different projects, contracts, and clients. This makes staying on top of all these earnings and expenses a bit tricky. Using a meticulous tracking tool of your business’s inflows and outflows throughout the year will help make tax season less stressful.

  • Set up a payment plan

Instead of paying a sizable amount of taxes at the end of the fiscal year, you can consider planning as soon as you receive your first paycheck of the year. Try estimating how much money you expect to make and how much you anticipate owing for taxes at the start of the year. Based on this estimate, you can make payments quarterly to reduce the expected total of your tax liability.

As payments come in, set aside a certain amount to a separate account to get ahead of your tax bills. You can avoid overspending that part of your income by saving them for a later date.

  • Note your deadline

When you run your own business, you’ll be accountable for keeping track of various critical deadlines. One of them is the deadline by which you must file your taxes. It could be a good idea to mark your calendar for April 15th, the last day to submit your taxes to the IRS.

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The bottom line 

After knowing how to file taxes as an independent contractor, it’s time to start gathering all your tax information, receipts, and other expenses documents, storing them all in a safe place before filing your taxes. 

Shoeboxed is a receipt management application that turns your receipts and business documents into a digital format in just one click by taking a picture straight from your smartphone or scanning a pdf. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes.

Access your Shoeboxed account from your web browser or smartphone app. Stay audit-ready with Shoeboxed for FREE now!

Qualified Business Income Deduction And Who Is Eligible?

The qualified business income deduction (QBI) is a tax break that allows self-employed and small-company owners to deduct up to 20% of their qualified business income from their taxable income.

What is a qualified business income deduction?

At the end of 2017, the Tax Cuts and Jobs Act formed a new business deduction known as the qualified business income deduction

What is the qualified business income deduction for?

This deduction is intended to lower the tax rate for pass-through entities and sole proprietorships

One of the Tax Cuts and Jobs Act’s main goals was to lower the corporate tax rate for C corporations, which was reduced from a top rate of 35% to a flat rate of 21%. However, the bulk of American businesses that are not constituted as C corporations do not benefit from a drop in the corporate tax rate. 

As a result, the qualified business income deduction was introduced to help pass-through enterprises and sole proprietorships decrease their effective tax rate.

Who is eligible for the deduction?

Business income 

To begin, you must have a source of business income. For this deduction, most income from a pass-through company, such as a partnership or an S corporation, is deductible, as is income from a sole proprietorship, which you report on Schedule C of your Form 1040.

Taxable income 

Second, you can determine what to do next by considering your taxable income, calculated prior to applying this deduction. You can get the deduction of 20% the lesser of your business income or 20% of your taxable income over your net capital gain if your taxable income is below a particular threshold amount, which is a defined dollar figure adjusted annually for inflation.

If your taxable income is above the threshold amount, then you can try taking two additional criteria.

The first criterion is based on your job or the source of your income. If your business income comes from a “specified service business,” you can’t use the deduction. 

What is a “specific service business”? It can be defined as a business that deals with health, legal, accounting, actuarial science, the performing arts, consultancy, athletics, financial services, or brokerage services.

For instance, if you are a doctor, a lawyer, or an accountant, and your income is over the threshold amount, you will not be eligible for this deduction. However, if your income is below the threshold, this restriction will not apply to you, and you will be able to claim the deduction. You may be entitled to a partial deduction if your income falls between the threshold and the phase-out amount.

The second criterion for taxpayers having taxable income above the threshold level is the qualifying wages and qualifying investment criterion.

Because the purpose of the deduction was to encourage business growth and job creation, a taxpayer’s ability to claim the credit is limited by one of two additional criteria. The taxpayer can choose to use either of these two criteria and will take whichever one results in a larger deduction for them.

The first criterion is that the limitation of the deduction is set to 50 percent of W-2 wages paid to the business’ employees. 

However, if the business does not have employees, the owner can choose to use the alternative test which has the deduction’s limitation of 25 percent of the W-2 wages paid to employees, plus 2.5 percent of the business assest’ cost. 

To sum up, the qualified business deduction is determined at 20 percent times the lesser of the two criteria – qualified business income or taxable income. 

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About Shoeboxed

Shoeboxed is an online application that can transform your receipts and documents into a digital format in just one click. It automatically extracts, categorizes, and human-verifies important data from your receipts so that you can go over and check your records anytime with ease. Shoeboxed ensures you will always have your receipts securely stored and ready for tax purposes. 

Stay audit-ready with Shoeboxed for FREE now!