Lo and behold it is the first week of November and time for you to begin your year-end tax planning. If you have an accountant or bookkeeper, pick up the phone and make an appointment. If you perform these functions yourself, then take action now, before Thanksgiving and Christmas ambush you. Your mission is to minimize the tax bill payable in April 2014.
Let’s start with your place of business. Do you work from home? Then consider taking the home office deduction.
Next, take a look at revenue generated in 2013. If this was a lucrative year, you are advised to push income into 2014, especially if you expect next year to be less flush. Study the matter before you invoice late 4th quarter projects. Call clients to confirm that it will be OK to invoice in January. Many are not on a January – December fiscal year, so deferring payment until January may not be a problem.
If you expect no substantive change in revenue generated from 2013 to 2014, consider investing in your business and creating additional tax write-offs this year, rather than next. Remember also to make a contribution to your Solo 401K, IRA or Roth retirement account. Freelancers who have already celebrated their 50th birthday are eligible to make a maximum $22,000 tax-deferred catch-up contribution to their Solo 401K each year, on money generated from self-employment only.
Further, those who’ve had a good year and hold a Solo 401K may deposit up to 25% of their income into the account. The tax-deductible and tax-deferred income limit is $49,000 for those under 50 years and $54,500 for those aged 50 years and older. See my post https://freelancetheconsultantsdiary.wordpress.com/2010/11/09/the-self-employed-401k-plan/ for more information.
The Affordable Healthcare Act must now be factored into your year-end tax strategy. Freelance soloprenuers who qualify for a health insurance subsidy (approximate income maximums of $45,000 for a single person household and $94,000 for a family of four) need not worry about the subsidy being treated as taxable income. However, if your insurer refunds to you a portion of premiums paid, that refund will be taxable and a 1099 will be sent.
Healthcare Act subsidies function to limit out-of-pocket monthly insurance premium costs for those who generate revenues below a certain threshold. The subsidy may be requested as follows:
1. Premium assistance credits, to reduce the monthly cost of health insurance
2. Up-front lump-sum payment
3. Tax credit on Form 1040, to reduce any taxes owed and perhaps create a refund
A statement that documents any subsidy will be issued and there will be an annual reconciliation. If you underestimated your 2014 income, you will be required to pay back a portion of your subsidy. If 2014 income was overestimated, then a refund will be somehow issued. Visit the website of either your state or federal health insurance exchange to obtain information about how to estimate your 2014 income.
YOU will be responsible for monitoring your annual income and ensuring that you receive the correct subsidy. Ben Tallman of Tallman Tax Service in Atlanta recommends that Freelancers monitor revenues and expenses at least quarterly and contact their health exchange and get themselves re-certified in the event of a large increase in income generated, to reduce the chance of facing a subsidy claw-back at tax time.
Thanks for reading,