As a freelancer, small business owner, or solopreneur, staying informed about changes to the tax code that can impact your unique financial situation is critical. In this guide, we will discuss certain tax code changes from recent years and other important considerations going into 2023, including:

The Tax Cuts and Jobs Act of 2017

Signed into law in 2017 under the Trump Administration, the Tax Cuts and Jobs Act (TCJA) is one of the most significant tax code changes in recent years. Its goals were to reduce tax rates for businesses and individuals, simplify the tax code, and stimulate economic growth.

One of the main impacts of the Tax Cuts and Jobs Act (TCJA) for freelancers and small business owners was the introduction of the Qualified Business Income (QBI) deduction. This tax deduction allows eligible self-employed individuals to deduct up to 20% of their qualified business income from their taxable income, effectively reducing their tax liability. Another tax consideration for independent workers is the self-employment tax, which is a combination of Social Security and Medicare taxes that they are responsible for paying on their net income. It’s essential to keep accurate records of income and expenses to maximize business deductions and reduce self-employment tax liability.

Impacts of TCJA and SALT on Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is a parallel tax system designed to ensure that high-income taxpayers pay a minimum amount of taxes. Under the TCJA, the AMT was retained but with increased exemption and phase-out levels. However, the changes to tax deductions, particularly the State and Local Tax (SALT) deduction, can still impact taxpayers who are subject to the AMT.

For example, the SALT deduction is not allowed for AMT purposes, which means that taxpayers subject to the AMT cannot benefit from this tax deduction. The reduction in the SALT deduction limit can also increase the likelihood that a taxpayer will be subject to the AMT.

Maximizing SALT Workarounds

In states with high taxes, taxpayers can use workarounds to bypass the limits on State and Local Tax (SALT) deductions. One option is to donate to a state-run charitable fund in exchange for a tax credit. This tax credit can offset state income tax liability and bypass the SALT deduction limit. For instance, in New York State, taxpayers can donate to the New York State Charitable Gifts Trust Fund and receive a tax credit equal to 85% of the donation amount.

Another workaround is the Pass-Through Entity (PTE) strategy, which benefits multi-member partnerships. Eligible partnerships can choose to be taxed at the entity level instead of the individual level, allowing them to deduct the full amount of state and local taxes paid without being subject to the SALT deduction limit. Partners’ share of the taxes paid by the partnership is treated as a reduction to their distributive share of income, resulting in lower tax liability. However, it’s essential to consult with a tax professional to determine eligibility and comply with state laws, as not all states allow PTE elections.

Understanding the Changes to Deductions

The TCJA made significant changes to tax deductions, some of which no longer exist. Here are some examples:

Other Tax Considerations for Independent Workers

Aside from the aforementioned tax considerations, freelancers and small business owners should be aware of other tax-related issues that can affect them, including:

It’s worth noting that these tax considerations are just a few of the many that small business owners and freelancers may face. Therefore, it’s crucial to work with a tax professional to receive personalized advice tailored to one’s specific financial situation and goals.

Work with a Harness Tax Advisor

Navigating the tax code can be challenging, but with the right information and strategies, freelancers and small business owners can maximize their tax deductions and reduce their tax liability in 2023. Working with a tax professional who can provide tailored advice and help navigate the complexities of the tax code is highly recommended.

In addition to working with a tax professional, there are also online resources available to help freelancers and small business owners with tax planning. Harness Wealth is a platform that connects freelancers and small business owners with experienced financial experts who offer customized solutions for tax planning, investment management, and estate planning. Working with Harness Wealth can save you time and help you focus on your small business or freelance while getting tailored advice to meet your financial needs and goals. Find your freelance or small business tax advisor at Harness Wealth today.

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Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers’ registration as an investment adviser with the SEC should not imply a certain level of skill or training.