It seems like a no-brainer to deduct your home-office expenses at tax time, but how big of a deduction do you take? Victoria Gillespie, national director of business development for REALTORS® Federal Credit Union, a Division of Northwest Federal Credit Union, has a useful rule of thumb: if your home office takes up 30 percent of your house, then deduct your household expenses at that same rate. That means deducting 30 percent of your mortgage payment, utility costs, and so on. Of course, any tax-deduction decision you make should be done in consultation with an attorney or tax advisor. But Gillespie’s rule gives you something to take to the professionals to see what they say.
Gillespie, who has 20 years of banking and investment experience, says incomplete record keeping is the number one reason real estate professionals and other independent contractors don’t take all of the deductions that are available to them. As you can see, correcting that deficiency opens the door for saving a lot of money on your annual tax bill. But how do you know what records to keep? Gillespie suggests you act as if you’re going to be audited tomorrow and keep those records you need to create a clear audit path for all of your deductions.
These and Gillespie’s other tips are intended to help you, as an independent contractor, prepare for your taxes all year long. That way, when tax time comes, you have the money set aside to pay your tax bill, and the taxes you pay are the smallest amount, based on your use of all the deductions and other benefits open to you.
You can get these and other ideas on managing your tax liability in this five-minute video, which REALTOR® Magazine produced in cooperation with REALTORS® Federal Credit Union. In the video, Gillespie talks about being smart about taxes. It’s the first in a series on managing your money as an independent contractor. The next video will look at the up and down nature of your income. Look for that in another month.
Go to second video in series, which looks at setting aside 20 percent for reserves.
Looking for more? Check out this video outlining five tech tools that can help you manage your finances.