Insurance Claims and Tax Deductions: A Primer
Insurance & Tax Deductions
Beyond the stress (and potential trauma) of an incident that leads to filing a property damage claim, no one likes to deal with the stress of dealing with insurance. Although we cannot help with the insurance end of things, we’ve put together this 101 on how to deal with casualties on your tax return. For starters you must first prove to the IRS that you are in fact the owner of the property. Also, you must notify the IRS of any insurance reimbursement you anticipate receiving with respect to your claim or monetary settlement from a pending lawsuit. Since the deduction only covers unrecoverable losses, you must deduct the aforementioned amount(s) from your tax deduction.
Actual loss
Generally speaking, the tax basis is equal to the amount you originally paid for the property. However the IRS will require you to use the smallest of the property’s tax basis to determine the deductible amount.
Deductible loss
After determining the actual loss, reduce that by $100. Note that the reduction is applied to each distinct casualty event, not each individual piece of property. After that, the total casualty loss for the year should be reduced by an amount equal to 10% of your adjusted gross income. The total is the amount you are able to claim on your tax return.
Tax time: what now?
There are two options: if your causality is the result of a federally declared disaster, you can use IRS form 4684 to claim your losses; if your loss was not in a federally declared disaster zone, you must be eligible to itemize your deductions. If your expenses exceed the standard deduction amount, you will augment your tax return with a Schedule A attachment.
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Tech Deductions You Should Know for Your Freelance or Small Business
Tech Deductions
Both freelancing and operating your own small business can be incredibly rewarding. These things can also be a lot of work, and it’s important to track every expense and claim every deduction for which you qualify. Nearly every type of business has become reliant upon technology, and therefore it’s important to know what tech-related deductions you can claim. While we’ve noted before that a good CPA can help you maximize your tax return, we also wanted to share a few deductions you should always plan for each year.
Home office deduction
Although not specifically tech, odds are your home office takes advantage of a computer, fax, printer, and the internet. We’ve mentioned this elsewhere before, but it’s worth repeating since many freelancers and small business owners work from home, if not primarily then at least infrequently. Remember that the space you intend to claim must be used primarily and first and foremost for business (i.e., even if you work from your dining table on occasion, you cannot claim your dining room as part of the deduction). Deductions can also be extended to certain home costs, such as utilities.
Internet and phone costs
Internet and phone bill costs directly related to your business can be deducted from your tax liability. For example, if you have one phone that you use for work and personal use, you cannot deduct your entire bill. But if you have a second phone line that you use exclusively for business, you can deduct that entire bill.
Computer for business use
If you purchase a computer for business use, you can deduct the entire cost in a single year. In order to qualify, the computer must be for business use more than 50% of the time. However if you also use the computer for personal use, you can only deduct the percentage of time for which you use it for work. For example, if you use the computer for work 80% of the time, and use it to stream movies and play games 20% of the time, you can only claim 80% of the cost.
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Freelancers and Expense Tracking
Expense Tracking
Freelancers are often busy: outside of working odd hours, they have to track their own business expenses, invoices, and taxes. Whether you decide to hire a CPA or take on everything by yourself, these tips will help you keep your finances in order.
Be transparent about your income and expenditures
Avoid the dreaded audit and always have a clear sense of your finances by simply being honest. Doing so will make filing taxes easier, and should you ever hire a CPA he or she will thank you.
Know your deductions
Do you have a home office? You can deduct some operating costs. Do you have to travel to meet a client or do research for a job? You can deduct those expenses. It behooves every freelancer to know what is and is not eligible for a tax deduction.
Use a separate bank account
Don’t count on your memory to track expenses and income. Doing so can lead to unfavorable discrepancies: if you overstate your income, you’ll pay too much in taxes; if you understate your income and the IRS finds out, you’ll have to pay back taxes which may include penalties and interest.
Utilize software
There’s an app for that. Even if you employ an accountant, proper software will help you stay organized and be able to present your expenses, invoices, and income.
Backup everything
Millennials and older generations remember tracking everything with paper records. While the tactile feeling of books may still be appealing, in the age of the cloud it’s a largely irresponsible way to track expenses by the simple fact that paper is hard to backup.
Backup your backups
This probably sounds absurd after we just pitched you on digital records over paper records. However cyber security threats are real and cloud storage is cheap–and in some cases free.
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On the Road: Traveling and Taxes
Travel Expenses
Traveling can be exciting, but it can also be costly. The cost of traveling can be somewhat insulting if the travel is required for work and you don’t have an employer who reimburses your out-of-pocket expenses. But good news: many costs you incur can be deducted from your taxes. Here are a few well-known – and some less well-known – expenses that you can claim while on the road.
It’s worth noting that expenses you intend to claim must be business-related (e.g., if you call your mother long distance from a hotel while on a business trip, you cannot claim the phone call as a “business expense”). Further, your expenses must be necessary, reasonable, and ordinary expenses–in other words lavish expenditures or indulgences are not deductible.
Also, always remember to track your expenses!
- 50% of the cost of meals: why eat fast food, when you can eat reasonable food? This deduction not only makes traveling less expensive, but also makes healthier food choices less cost-prohibitive. Bon apétit!
- Airfare, bus fare, railway fares, and baggage fees: often the most expensive part of traveling, these expenditures are, in fact, deductible.
- Local transportation costs: taxi, Uber, and bus fares are all deductible.
- Expenses of operating and maintaining a car used for business commuting or travel: this includes the cost of gas, oil and fluids, parking fees, tools, even parts and repairs.
- Cleaning and laundry fees: look sharp for business!
- Computer and hardware rental fees: internet cafes are generally a thing of the past in the US, but if you need pay for wifi, or to rent a computer, projector, etc. for your business purposes it is deductible.
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Can Unwed Couples Claim the Mortgage Deduction?
Even if you are not married, both parties in a relationship can claim the mortgage interest deduction. What you do is straightforward: follow the money. If you pay the entire mortgage, you claim the entire mortgage.
Calculate Shares of Deduction
To calculate your share of the deduction, multiply your monthly portion of the mortgage payment by 12. You can deduct this amount. If you pay percentages, calculate that percentage instead.
1098 Form
The IRS only issues one 1098 form, regardless of how many names are on the title or deed of a house. The person whose name appears first on the title will receive the 1098 form. This does not mean that only one person can claim these funds.
You will need to file a Schedule A return, explained below, and you will be able to separate your deductions accordingly on the Schedule A. It is ideal to make copies of the 1098 form for all parties listed on the title or deed of the home.
Completing Schedule A
The person receiving the 1098 form will enter their portion of the deduction on line 10. Those who are not included on the 1098 will enter their deduction on line 11. You will also include a note, “see attached,” for proof of home ownership and mortgage payments. This attachment should be a detailed statement of how much interest was paid by each person listed on the deed.
Finalizing Things
Some couples may choose to trade years to claim the entire deduction. Keep all tax records of who is filing when in case of audit. You deduct what you personally paid into the mortgage.
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What Types of Fees can Freelancers Write-Off as Business Expenses?
One of the benefits of working for yourself is that you can write-off expenses which you would not ordinarily be able to write-off. Things which would otherwise typically be categorized as a luxury item wind up not being a burden. In this article we will cover the types of things freelancers can write-off on your taxes as a business expense.
Equipment Related To Running Your Business
As a freelancer, you can usually write-off equipment that you purchase to run your business. You can usually write-off the cost of your computer, your internet service, your phone service, and your phone itself. If you make clothes, you could write-off the purchase of your sewing machine and fabric. If you use your car in your business, you can write-off your mileage.
Service Provider Fees
You can also write-off the fees you pay to service provider who confer benefits to your business. For instance, as a freelancer you can write-off fees that you pay to your attorney and your accountant.
Educational Fees
You can deduct fees for training. This includes seminars, workshops, books, and DVDs that you purchase to help you stay on top of your field.
Home Office Deduction
You can also take a tax deduction for the portion of your home that you use for your business. This section of your home can only be used for business if you plan to take this deduction.
Running your own business from home can be challenging. You do have to invest a certain amount of money up front. These deductions can help put some of that money back in your pocket.
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The Basics of Claiming Non-Reimbursed Work Related Purchases
If you are employed, it is not advisable to take on work-related expenses which your employer should pay. You should not pay them, and your employer should reimburse you for the expense in question. However, should you find yourself in this position, know that you may be able to deduct work-related purchases from your taxes.
Things to Know About Claiming Non-Reimbursed Work Expenses
- Non-reimbursed work expenses are deductible much the same as if you were self-employed. Each expense you incur is subject to the same tax regulations as a business expense for someone who is self-employed.
- The expenses must be ordinary, necessary, and reasonable. There are special rules for other expenses, but they must apply in maintaining or improving the skills in your current job.
- Deductions for an employee’s related job expenses are limited. You can only claim the expense if it is more than 2-percent of your adjusted gross income. Anything below that, you cannot claim. The more your adjusted gross income is, the lower you can claim. Thus, it is recommended that you avoid making purchases for which your employer will not reimburse you.
To help you avoid claiming expenses for non-reimbursed work related purchases, it is best to review your employer’s reimbursement policy. Always be sure to claim from your employer any expense that you incur for your job. If you fail to do so, you will not be allowed to claim it as a deduction. Employees should never pay out of pocket for something which is necessary on the job.
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How to Save on Taxes via Parking and Commuting Costs
For some people, commuting to work is one of the largest expenses in their budget. If you spend much of your time commuting to and from work and much of your money on gas and parking, here are some tips on using these expenses to save on taxes.
Ask for Pre-Tax Commuting Benefits
If you live in a metropolitan area that has transit, many transit authorities will set up pre-tax purchase plans with workplaces. For example, your employer can offer monthly commuter passes for the trains and buses in your area and allow employees to take off the commuting costs from their pre-tax income. This provides you with a green commute and saves pre-tax money, as well.
Go Directly from One Job to Another
If you have more than one job or more than one work site, you can go from one site to the next and deduct these expenses on your taxes. Since this is direct work-to-work commuting, this is a work cost that is deductible from taxes. Make sure that you keep track of work-to-work commute expenses and mileage during the year.
Self-Employed Can Write Off All Commuting
If you are self-employed, you can write off the commute that you use in order to see clients or conduct business activities, including parking. If you do freelance work or if you own your own business, keep track of the mileage that you use during the year, the tolls that you pay, and any other commuting expenses. This can be used to your benefit during tax time.
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