Retired Military Finances 101: 5 Tax Deductions You Can Take if You're an Independent ContractorRetirement Funding Taxes
More than a couple retired senior military officers and senior NCOs become independent contractors. If this is the case for you, there are a number of valuable tax deductions to be aware of. From conducting business from your home office to claiming travel expenses, here are five tax deductions to take into account in the upcoming year.
Deduction #1: Home Office
One of the most utilized aspects of self-employment can also be one of the more complex deductions. If your office is in your home, you can deduct expenses associated with it. But it is a little complicated. First of all, the space you claim as your home office, must be exclusively used as your office. If your office is the dining room table you probably can't deduct it. To help a little, your office need not be a full room. Just pretend you're Les Nesman and "tape off" your office and only claim that space. You can take a pro-rated amount of all the expenses of maintaining the home. Or you can take a safe-harbor dollar amount per square foot. I like the second option, as you don't have to claim depreciation recapture when you sell the house.
Deduction #2: Health Insurance
If you're retired from the military, you'll have TRICARE for health insurance. But that isn't the only health insurance out there. You can deduct premiums for dental or vision insurance. You'll also be able to deduct Long-Term Care Insurance, though the amount may be limited. And if you have a child on TRICARE Young Adult, you can deduct those premiums as well. Unlike deducting health insurance as an itemized deductions, there isn't a 7.5% threshold you have to meet prior to deducting anything.
Keep in mind that as an adjustment to income as opposed to an itemized deduction, you don’t necessarily need to itemize in order to claim. It’s important to note that if you are eligible to enroll in a spouse’s employee plan and choose not to for any reason, you will not be unable to take this deduction.
Deduction #3: Education
If you plan on deducting any expenses related to education, they must be related to maintaining or improving your knowledge and skills associated with your current business (this means if you’re interested in branching out and learning about something new, the associated classes or coursework won’t be deductible). If you are furthering your education with coursework related to your industry, then items such as tuition, supplies, lab fees and other related expenses may be deductible. Requirements can be reviewed using the IRS website.
Deduction #4: Travel
In order for business travel to qualify as a tax deduction, it must be longer than an ordinary workday, take place away from the general area of your home and require you to sleep or rest. Furthermore, you must engage in business activity during such a trip in order for it to be considered business-related. Whether you’re meeting with customers or gaining insight or skills related to your business, the travel must be associated in some way.2 It’s important to hold on to receipts and records during these trips as the IRS often keeps a close eye on this form of deduction.
Some of the expenses that may be considered deductible during travel include the cost of transportation (such as airfare or car rental), lodging and associated meals. While you don’t need to book the cheapest options, you won’t be able to deduct outlandish expenses. As with any trip, it’s important to keep your costs reasonable as you are the one paying the majority of them.
Traveling for business often takes a toll but being able to deduct 100 percent of your travel expenses for business (except for meals, which are limited to 50 percent) can help make the effort less stressful.2
Deduction #5: Retirement Savings
When it comes to retirement, you have a fair amount of options as a self-employed individual. Taking into consideration your contributions to an IRA or solo 401(k) plan can help you gain tax-deferred investments down the road.
As someone working for themselves, you can contribute to a solo 401(k) plan of up to $57,000 in 2020 if you have enough income. Similar to a standard, employer-sponsored 401(k), your contributions can be pre-tax and distributions after age 59½ are taxed or they can be Roth contributions.3
This benefit will only help if you have the opportunity to take advantage of it and keep in mind that you can’t contribute more than you earn. Your specific retirement plan type may contribute to varying contribution limits and the IRS also adjusts associated maximums on an annual basis.
The Bottom Line
While most self-employed or small business tax deductions are complicated, being aware of these basics can help ensure you don't leave any valuable deductions on the table. By keeping in mind whether an expense is necessary to your business operations you’ll be on the same page as the IRS as they examine your deductions. If you’re ever unsure of an expense and it’s deduction capabilities, or if you simply want a tax strategy to optimize your earnings, meeting with a financial advisor or enrolled agent is good idea.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.