Tax Tips

It’s that time of year again! I just finished preparing my 2014 taxes. I actually enjoy the process of identifying new ways to reduce my tax bill (but I don’t enjoy writing the check at the end).

Even if you hire someone else to prepare your taxes, it’s useful to be aware of potential savings so that you can provide your accountant the proper documentation. Here are some tips, in no particular order.

Itemize your deductions
You can take the standard deduction, but it’s worth calculating your itemized deduction to see if it’s larger. Below are a few ways you can increase your itemized deduction

a) Bunching Property Taxes
If you live in a state like Texas with high property taxes, see if you can “bunch” two years of payments into a single year. I get my property tax bill in November and it’s due in February. I paid my 2014 property tax bill on 1/1/15, and will pay my 2015 property tax bill before the end of the year. This lets me alternate years where I itemize my deductions (when 2x property tax so higher than standard deduction), and then take the standard deduction on the other years (when 0 property taxes so lower than standard deduction). Over two years you’ll end up with a larger tax deduction than if you had taken the standard deduction both years. This applies to any itemized deduction that you can control the payment year of, but for me it’s really only property taxes.

b) Deduct Mortgage Interest
The biggest tax break available to individuals is the Mortgage Interest deduction, if you itemize your deductions.

c) Deduct State Sales Tax
You’re able to deduct your state income or sales tax on your itemized deductions. Since Texas doesn’t have an income tax, I can deduct the sales tax I pay. There’s a standard deduction you can take if you don’t want to keep track of your receipts. I saved all receipts with sales tax of $5 or more this year to see how close I came, and the standard deduction was 4x what I had documented so I took the standard deduction.

Always save documentation on major purchases like cars, home appliances and home improvements. These can be deducted in addition to the standard sales tax deduction on ordinary expenses.

Health Insurance
If you’re self employed, you can deduct your health insurance premiums. This happens on Form 1040 (line 29) so you can do it even if you’re taking the standard deduction instead of itemizing it on Schedule A.

Retirement Savings
I highly encourage you to try to maximize your retirement savings, especially if you’re self-employed. Self employed retirement plans are deducted on Form 1040, line 28.

I personally use a SEP IRA which lets me put away about 20% of my income, up to a max of $53,000 for 2015. This reduces my taxable income by however much I contribute. If you have employees this plan probably won’t be right for you (you’ll need to give all employees the same amount you give yourself), but there’s other retirement plan options you could use (SIMPLE IRA, Solo 401k…).

At the beginning of every month I use a spreadsheet to tell me how much to pay myself in Salary, Savings, IRS Savings, and SEP IRA. It’s much easier to make monthly contributions before you see the income than to wait until the end of the year and think about writing a really large check.

I put in a slightly less amount than the max, then when I put together my taxes I calculate the max for the year and top it up to that point. This is because your max depends upon your Net Profit as calculated by IRS (might be different than you internally calculate, like 50% deduction for business meals) and Self Employment Tax.

Roth IRA
If you qualify for a Roth IRA, max it out! This uses after tax dollars (so won’t affect your current tax bill), but your earnings grow tax free and you get tax free withdrawals from it when you retire. You can also withdraw your contributions (but not the earnings) tax-free at any time. If you don’t qualify, you can look into doing a Backdoor Roth IRA – basically setting up a traditional IRA using pretax dollars, then immediately convert it to a Roth IRA and pay tax on it.

Health Savings Account
If you have a High Deductible Health Plan, you can get an HSA which is basically a savings account for medical expenses into which you can place pre-tax dollars (reducing your tax bill which effectively reduces the cost of your medical expenses). Max this out if you can! Even if you don’t have large medical bills this year, one day you will. And if you’re lucky enough to not ever have big medical bills, at 65 you can withdraw from the account without penalty, but you will have to pay tax on withdrawals for non-medical expenses.

But here’s my absolute favorite aspect of an HSA and barely anyone knows about it: you can treat it as a Super Roth IRA. Money you place in it can be invested and come out tax free, just like a Roth (assuming you have a medical expense to match it with). Even better, the money you put in is pre-tax (unlike a Roth which uses after tax money). AND you don’t have to wait until you’re retired to withdraw it, you just need a medical expense. There is no time limit on how long you can wait until you reimburse yourself.

I max out my HSA, then pay for medical expenses out of pocket. I save the receipts in a folder (and scan a digital copy). At the end of the year I write on the folder how much in unreimbursed medical expenses I have in there. Any time I want tax free income (e.g., retired early and want to draw it down before I have access to SEP IRA), I can pick a folder and write myself a check from the HSA reimbursing myself for those medical expenses.

Between now and that withdrawal, the money has been able to grow tax free in investments. If I put in $6,650 (2015 Family max) and invest it with a growth rate of 6%, in 25 years it will have grown to $28,541. By paying for medical expenses out of pocket and after tax now, I can let an equivalent amount of money grow tax free in my HSA. Pretty awesome deal, especially if you don’t qualify for a Roth IRA.

Home Office Deduction
I never took the home office deduction until this year. Previously it was really complicated. You had to take all relevant bills (mortgage interest, utilities, internet…) and multiply them by the percentage of your house the home office takes up. You also had to calculate the depreciation of that percentage of your house. And when it came time to sell your house, your business will realize a profit from the sale of its portion of the house. The profit will be bigger than you (the individual) get because the business has been depreciating the house, lowering its cost basis. And the business won’t get to use your personal exclusion on $250,000 / $500,000 (married) of the profits. (More info)

BUT now there’s a simplified home office deduction. You get $5 per square foot of your home office. That’s it. No saving bills, no depreciating your house, no unexpected taxes due if you sell your house. Just $5/sq foot. Get out the measuring tape and lower your tax bill.

Business Vehicle Usage
Driving to WordCamps, WordPress meetups, business meetings, or your accountant’s office? Keep a log of your miles driven and multiply it by the standard mileage rate for a deduction on your Schedule C (business profit & loss).

Keep track of business expenses
This is a given. If your business makes a profit, keep track of expenses required to make that profit which you can deduct on your Schedule C. But here’s a tip that will make your life easier when it’s time to prepare taxes: Go to your Schedule C, Part II (Expenses) and use the categories they list there to categorize your own expenses. Then when you’re doing your taxes you just work your way down the list. No need to go through all your expenses and reclassify them. The only expense I have as a separate category is “Payment Processing Fees” which I put in Part V, Other Expenses.

Child Daycare Deduction

We had a baby last week! When my wife’s maternity leave is up she’ll be going to daycare. I’ll keep track of how much we spend on that and deduct it on Form 1040, Line 49.

529 Plan
Another thing I’ll be setting up in 2015 is a 529 Plan, which is an investment account for college expenses. It’s similar to a Roth IRA in that after tax money goes in, but it grows tax free and can be withdrawn tax free for qualified education expenses.

Each state usually offers 1 or 2 of its own plans: prepaid tuition and an investment option. Your state might also let you deduct contributions from your state income tax. You don’t have to use your state’s plan though – you can invest in any 529. Texas doesn’t have state income tax so there’s no tax benefit for me using the Texas plans. I’m going to go with the Vanguard 529 most likely since it has low fees.

My goal is to have about half of college costs covered in the 529. I’m planning to pay for the rest either out of current income or savings. The American Opportunity Tax Credit is a dollar-for-dollar tax credit for 100% of the first $2,000 and up to 25% of the second $2,000 you pay out of pocket for college costs each year. If you qualify, use that to pay for the first $2-4k, then 529 for the remaining college expenses.

Quarterly Tax Payments, Safe Harbor
If you’re self employed, you need to make quarterly tax payments. If your payments don’t equal 90% or more of your final tax bill, you’ll get late fees. Taxes can be confusing, it’s difficult to know exactly what your tax bill will be until you file. But there’s a “safe harbor” clause: Pay 90% of last year’s tax bill, or 110% if your adjusted gross income is > $150,000 (see here). So when preparing your taxes, take your total tax and break it down appropriately into quarterly payments on your 1040-ES.

Refund as I Bonds
I Bonds are government savings bonds that are inflation adjusted. Basically you get a fixed rate of interest as well as an “inflation adjustment” that makes sure your bond continues to grow, regardless of inflation levels. Some people use these for college savings since the earnings can be used tax free for qualified education expenses.

Others (like myself) use them as an emergency fund since they pay better than bank accounts / CDs, last 30 years, and can be withdrawn at any point after the first year you own them. Whatever you plan to use them for, you’re limited to $10,000 per year from But you can get an additional $5,000 as your tax refund.

In February I prepare my taxes, then calculate my remaining payment: Total tax – already paid (quarterly payments) + 5000. That’s how much I need to pay to get a $5,000 refund. I send in Form 4868 requesting an extension and include my remaining payment. I watch my bank account, and once the check has been cashed (usually a week or two) I file my actual taxes, which includes Form 8888 requesting my $5,000 refund as I Bonds. Here’s a post I wrote last year that goes into more detail.

Bill Erickson

Bill Erickson is the co-founder and lead developer at CultivateWP, a WordPress agency focusing on high performance sites for web publishers.

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  1. Katie Rosebraugh says

    Nice post Bill. I highly recommend anything Vanguard because of the low fees. I used to be in the financial advisory business and this post was a nice refresher for me. Thanks for taking the time to write this.

  2. carrie dils says

    Hey Bill,
    Great tips! I’ve never bothered to track mileage because, well, it’s a pain in the ass to keep a log. I’ve turned a new leaf this year and found an (almost) great solution:

    * I bought Automatic (small device that you leave plugged into your car’s diagnostic port) – (
    * Set up an IFTTT that sends every trip (defined as start the car / turn off the engine) to a Google spreadsheet

    The only imperfect part is that Automatic doesn’t include a way to denote a trip as “work” directly from their app, so I have to remember to go into the Google spreadsheet and clean out the logs that aren’t work-related, but if you keep a good calendar about meetings, meetups, etc., it’s not too hard to match up the trips.

    There may be more elegant/automated solutions, but for me this is so much more enticing that keeping a written log in the car.


    • Bill Erickson says

      Nice! I usually only have 2-3 trips that I actually keep track of (like driving to Dallas for WordCamp DFW) but if I had a nifty tool like this I might keep track of the smaller trips too.

      • Clifford P says

        I’ve heard that if you ever get audited, you need to have records for *every single mile driven*, not just business miles. Thus, everyday you don’t drive for work, you still record it as personal, commute, medical, whatever.

        In other words, you can’t just say, “I drove 100 miles to Dallas on Feb 18, 2015, in my Honda Accord” and be done with it.

        Basically, EVERY SINGLE TIME before you leave your garage, start up the vehicle, enter mileage (follow that template’s instructions to add to your phone’s Home Screen), buckle up, and be on your way.
        It’s habit now and no longer a burden. It’s actually comforting because you know you have your phone and your records are solid.

        And the template has instructions for turning the data into a pivot table to make light work of your year end mileage.

        I hope it’s helpful.

    • Clifford P says

      Hi Carrie. or Shoeboxed offer mileage trackers too. However, I have multiple businessesmy wife and I swap vehicles, and we track other deductible miles like medical and volunteer. So having to distinguish personal, commute, work1, work2, medical, etc… I just use a Google Form. I can’t find the link to it on my mobile but if you search Google Drive templates for Free Mileage Log for Smart Phone then you should find it and it comes with instructions. Hope it helps. 🙂

  3. Neil Brown says

    The best piece of advice I was given when I started out over 15 years ago was keep every receipt and hire the best accountant you can afford. It Works.