03-21-07 - 2

Some tax tips I've learned that weren't totally obvious to me : (mainly for independents or self-employed)

1. Health care deduction. Health insurance costs (literally your monthly payments for health insurance) are easily deductible. Your actual out of pocket health care costs are NOT deductible easily (unless they are huge, they have be greater than 10% of your income or something like that). This means that there's actually a big tax advantage to having a health plan with a higher cost and a lower deductible, even if that plan is not the optimal plan for you in a straight sense. I guess with the deduction you're getting a 30% discount or whatever on your dollars spent on the health care plan, so if you can spend another $1000 per year on the health care plan, you only need to reduce your expected deductible payouts by $700 to break even.

2. Estimated tax. If your tax is not being with-held you need to make estimated payments with 1040-ES. There are a lot of funny caveats with this. Basically it's not that bad to just not do it at all. The only penalty is you have to pay the interest they would have earned if they had your money, but presumably by keeping the money you made that interest, so you break even on that. The problem occurs if they think you *intentionally* didn't pay your estimated tax, in which case you're liable for fines and audit and all that. So if you make a good faith effort to estimate and pay your quarterly, it's not a big deal if it's too much or too little, you just fix it up at the end of the year.

3. Credit card for deductions. I hate keeping track of this stuff. The way to do it is really to just get a seperate credit card for "business expenses". The credit card companies want you to have cards all the time, so just get one, it's quick and easy, you use it for all your biz purchases and there you go - records.

4. Seperate home office. If you're working from home, try to get a setup with your "home office" as a separate room. eg. don't just use a corner of an existing room. This is pretty significant and should be a factor you consider when looking at apartments or choosing how to lay out your furniture. To be a legal/safe deduction the home office must be a separate room, so you should prefer apartments with a few small rooms rather than one large one, which is what I would normally prefer.

5. An "Enrolled Agent" is a tax specialist, a CPA is not. You should use an EA if you hire someone to do your taxes and you can find them here : NAEA

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