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May 23, 2022

Overlooked tax breaks and deductions for the self-employed

Ben Fuchs

Tax season is over for another year, but that’s not a reason to stop thinking about retirement planning and how to lower your tax burden.

That is particularly true for the rapidly growing number of people who are self-employed. Too often, however, the daily challenges of running a business results in opportunities — and potential savings — being missed.

The ranks of the self-employed, accelerated by pandemic-induced changes in the workforce during the past two years, are at levels we’ve not seen before.

Nationwide, nearly 5.4 million applications were filed to form new businesses in 2021 — the most of any year on record, according to the U.S. Census Bureau’s Business Formation Statistics.

The number of self-employed workers actively at work rebounded strongly as the economic recovery took hold, increasing by 17.6% from the second quarter of 2020 to the second quarter of 2021. That strong rebound from the depths of the pandemic pushed the number of self-employed to 14.9 million, restoring it to 2019 levels, according to a Pew Research Center analysis.

For those new to self-employment status, and those who have managed to ride out the impact of the pandemic and regain their financial footing, there couldn’t be a better time to take a closer look at the tax-related possibilities.

Your business’s success is in your hands when you’re self-employed, so you need to be knowledgeable about and take advantage of whatever assistance is available — especially when it comes to lowering your tax bill.

It’s commonly known that the government subsidizes certain personal expenses when you work from home. The key to this deduction is to use a dedicated space regularly and exclusively for business.

Additionally, part of your utility bills, phone and internet, and insurance costs may be deductible. You can also write off part of your rent or, if you own your home, depreciation. In recent years, the IRS has come up with a simplified method for figuring out this deduction, allowing taxpayers to deduct $5 for every square foot.

Once you start working for yourself, the door also opens to options and choices for tax-sheltered retirement plans. For example, you can contribute pretax money to a simplified employee pension (SEP) or a solo 401(k), both of which have higher annual limits than regular individual retirement accounts.

You may also get a tax credit for your retirement plan’s contributions if your income isn’t too high. It’s called the Saver’s Credit, and it can trim up to $1,000 off your tax bill ($2,000 for married couples). The credit is worth 50%, 20% or 10% of your contributions, depending on your adjusted gross income.

Don’t discount the qualified business income deduction (aka, the Section 199A deduction). It’s available for owners of S corporations, partnerships, LLCs and other “pass-through entities” as well as those operating as sole proprietors.

It’s a tricky tax break with several particular rules and restrictions, but the write-off can be sizable if you’re able to jump through all the hoops.

There are additional tax breaks within reach for small businesses, and determining whether and how you can take advantage of them as a self-employed business owner is worth exploring.

At the end of the day, doing so has the potential to improve your prospects to achieve the qualified retirement you’re striving for.

Ben Fuchs is a certified financial planner and founding principal of Fuchs Financial, with offices in West Hartford and Middletown.

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