More Work-related Tax Benefits
7: Retirement Account
If you're an employee and your company offers a 401(k) or similar retirement savings account, put in as much money as you're allowed and can afford, especially if your employer matches or contributes to the plan as well. Often, contributions are made pretax, which means the IRS won't tax you on as much income.
Another upside, for most plans: You can change your contribution amount at any time, so as it nears the end of the calendar year, check with your plan administrator to see if you've maxed out your contributions -- and do so if you haven't and can afford it. Contribution limits vary depending on the type of plan and your age, so again, check with your administrator for the rules about your plan [source: IRS Retirement].
The self-employed also have options for saving for retirement. You may want to open an IRA, or individual retirement account. These plans offer ways to save for retirement and provide tax benefits as well. IRAs come in two varieties: traditional and Roth. With a traditional IRA, you make contributions that may be fully or partially deductible, and any money in your IRA is not taxed until it is distributed.
With a Roth IRA, you can't deduct the contributions on your taxes, but qualified distributions are tax-free. Like 401(k)s, IRAs are also subject to contribution limits. In 2014, the max you could contribute was the lesser of $5,500 or the sum total of your income for the year. If you're over 50, they let you play catch up, and you may contribute $6,500.
6: Home Office Deduction
Employees and the self-employed alike can often deduct expenses related to a home office. If you've worked from home and tried to claim the home office deduction in the past, you'll be relieved to know that in 2013 the IRS finally offered up the simplified home office deduction.
With the simplified deduction, you still have to meet two basic requirements. First, you must use a portion of your house regularly and exclusively for business. You can't cram a desk into the baby's room and claim the entire nursery, for example. Second, it must be your principal place of business. For employees, this means you can't go into an office most days and still take the home office deduction. You also can't take the deduction if your employer reimburses you for home office expenses.
If you meet the above requirements, here's the way the simplified deduction works:
- Use a standard deduction of $5 per square foot of space used for business, up to a max of 300 square feet (91 square meters).
- Claim allowable itemized deductions, such as mortgage interest, utilities or real estate taxes on Schedule A.
- Don't worry about the home depreciation deduction. It isn't allowed with the simplified option.
If you're one of those people who just likes doing paperwork, you're welcome to continue figuring your home office deduction using the more complicated method. The IRS still allows it [source: IRS Simplified].
5: Office Supplies and Equipment
If you run a business out of your home or are an employee who works from home, you can now use the simplified home office deduction and often deduct a portion of expenses such as your mortgage payment, utilities, Internet and phone bill, as well as equipment like a computer, printer, phone, fax and office supplies.
Don't forget auto expenses, beyond mileage, if you use your car for business. Generally, you can't take the mileage deduction and also deduct expenses like insurance, gas and maintenance.
Check out the IRS's rules about these deductions, or talk to your accountant about them. For employees, some of these expenses are subject to the 2 percent rule mentioned in the intro and are only deductible to the extent that they total more than 2 percent of your AGI.