Federal Income Taxes: Standard Deductions vs. Itemized Deductions (AKA How Not to Commit Fraud)
The Finance Department (Part 4)
As you can see from the chart above, your book business falls under your personal income tax umbrella, but let’s break it down even further.
Itemized vs. Standard Deductions
When you file your personal income taxes, you have two choices: itemize deductions or use the standard deduction. Both serve to lower your taxable income, but you have to do a little math in order to figure out which option saves you the most money.
Standard Deduction: The standard deduction is a fixed dollar amount that reduces the income you’re taxed on. Your standard deduction varies according to your filing status (your marital status and senior status, among other things). It’s best to use this deduction if your itemized deductions do not exceed your standard deduction.
Itemized Deductions: Itemized deductions also lower the amount of income you pay taxes on. The amount saved depends on your tax bracket and how many expenses you can legitimately claim. These are itemized personal deductions, not your book business expenses.
Book Business Deductions
You also have two choices when it comes to your book business. You can either itemize your deductions, which means keeping receipts and records, or you can ignore your expenses and pay more in taxes. Last week’s post covered business expenses that you can write off, items like mileage, shipping, advertising, royalties you paid to writers you publish, etc.)
You can also write off your home office. A portion of certain household expenses can be written off under the business-side of the umbrella.
Why? Because some of your book business income went to pay for portions of your book business office (the portion of your home you use for work). You do not pay taxes on income you did not actually keep.
Potential Work from Home Deductions
Because you work from home, you can deduct a portion of your:
- property taxes
- utilities (water bill, electric bill, natural gas bill, etc.)
- interest on your home mortgage or rent
- insurance
- cell phone bill (if used for business)
- business miscellany (toilet paper, hand soap, etc.)
Portion is the keyword. You must come up with an estimate of what portion of your home expenses are actually business expenses. You could base your estimate on the number of rooms or on the square feet in your house. Decide what percentage of your house is used for your book business. Don’t just pick a number out of thin air. Make sure you can defend that number if an auditor asks you how you came up with it.
But wait. There’s a catch. It’s an either or situation. You can either deduct certain items from the business category or the home category. You cannot deduct the same expense from both places. That’s called fraud. However, you can deduct a portion from business and then you can deduct the remaining portion from home.
Unique circumstances exist for each individual or family, so pay attention. If you itemize, you cannot write off the same expense twice: once for business and once for personal.
For example:
Let’s say you have a $1,000 property tax bill and claim 10 percent of your house as your book business office.
You can claim $100 of your property tax bill as a business expense and $900 from your overall personal expenses.
Claiming $100 as a business expense and $1000 on your home expenses is fraud.
If you aren’t sure about your deductions, hire a professional, but remember that you are still responsible for the recordkeeping and for the documents you file.
Disclaimer: Don’t trust me. Go to IRS.gov and confirm the information for yourself. I’m not responsible if you get audited. Also, state income taxes are separate beasts, and you’ll have to tame them for yourselves unless you are fortunate enough to live in a state without them.
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