IMPORTANT NOTE: THIS INFORMATION IS OUT OF DATE AS OF 2018
Do You Need to Care About Itemized Deductions?
Choosing whether you use the standard deduction or you itemize deductions is one of the key parts of a tax return. That’s a fun sentence, huh? Unfortunately, it’s not always clear which route is best until you do the math.
Often, this is a major reason to hire a tax preparer. They’re much more comfortable with the process and can make the decision more quickly. Let’s take a look at your different options and the ones I think will be most relevant to you.
If you want to learn more about tax basics before jumping in to this article check out our tax basics!
Standard Deduction
First, let’s look at what we’re comparing against when itemizing. The standard deduction is the one that everyone can take. It’s a flat $6.3k. A single filer gets one deduction and a married couple gets 2. That means that if you as a single filer earned $50k you could immediately take $6.3k out of your income. This is great because it reduces your Adjusted Gross Income (AGI) which is the amount you pay taxes on.
Your standard deduction could be higher if you’re a single parent, blind, or over age 65.
If your itemized deduction wouldn’t be higher than your standard deduction you should take the standard deduction. That’s what my wife and I do!
Schedule A
This is the form where you put down your itemized deductions. You can check out the form here. It walks you through the different items that might be relevant to you but like most IRS documents it requires some outside reading. I’d highly recommend looking over it. While we’ll discuss some of the items that are most likely to be relevant to you there are others that could apply as well.
One note that will be important for some of you: If you’re making over $260k single or $311k married the you’ll have a reduction in your itemized benefits.
Key Deductions for Streamers
Finally, here are the deductions that should be most relevant to you.
Taxes Paid
As always, the IRS has a comprehensive summary here. The major taxes that might be relevant to you are state income or sales taxes. If you’re in a state with an income tax you deduct that and if your state doesn’t have income taxes you can deduct sales tax. You can also deduct estimated taxes paid if that number different from the actual tax required. This is relevant to you as a self-employed individual since you should be paying estimated taxes.
Similarly, you can deduct real estate taxes paid. This is a nice benefit the government gives you for owning a home.
Interest Paid
The big one here is home mortgage interest. If you own a home with a mortgage you’re likely paying a good deal of money in interest. While mortgage rates are low right now it can still add up to a lot of money because of how much money you borrow. This will be especially true in high cost of living areas.
You can also include private mortgage insurance (PMI) paid and “points” you had to pay to secure a mortgage. Those points are bonus interest you pay on a loan at the start to reduce your rate over the life of the loan. If you paid points then that will be in the mortgage documents you have.
One important note: this doesn’t count your student loan interest. That you can deduct regardless of if you itemize.
Home Office Deduction
This is a big one for streamers. Unfortunately, it’s also an extremely complex one. Read up more on it here!
The basic gist of it is that if you meet all of the rigorous standards you need to meet to qualify you can deduct some of the cost of running a home office. That’ll either be a proportional amount of your overall home expenses or a set formula based on the size of your office.
Hobby Expenses
If your stream is a hobby and not a business then you can deduct expenses from your hobby. Unfortunately, this also has some pretty strict rules. First, you can only deduct expenses up to the amount of income you earned. This means for tax purposes you’re zeroing out your hobby. Second, hobby expenses are limited by the 2% rule. This is a rule that states that you can only take certain deductions if all expenses subject to the rule add up to more than 2% of your AGI. That’s a good chunk of change!
Tax Preparation
Hopefully you’re paying someone to help with your taxes if you’re having some success as a broadcaster. If so, you can deduct that cost, subject to the 2% rule. Guess what?! When you pay someone to do your tax preparation they’ll know to look for things like their own fees as potential deductions!
Conclusion
You want to make sure you’re not leaving money on the table. It may not make sense for you to itemize your deductions but you should still check. If you own a home, pay a lot in state taxes, or have high medical bills you most certainly should review your itemized expenses.
You don’t have to figure this out alone. This is what we do- help streamers make great money decisions. If that’s something that sounds interesting to you reach out me or schedule some time for a free consult. You can check out what I do here.
