At the end of 2017, new tax legislation passed that took effect for the 2018 tax year. I’ve read several articles about people who are surprised that their refunds are smaller. (Refunds — ha! What an idea.) I understood the shell game our wretched government was playing, giving salaried workers more in their take-home paychecks (paychecks — ha!) while changing the tax code so their actual tax liability is at least as much, if not more, than before.
Fools, I remember thinking. Pay attention! This isn’t real! I marched along, smug in my knowledge that as a freelancer household, none of that applied to us.
I was entirely oblivious to what was coming.
Here’s how it breaks down for us: Our income is not a lot — we made rather less than $50,000 last year between both of us; it was not a super great year for a lot of reasons. Because all of that income is 1099 income, it’s subject to self-employment taxes. Those taxes are applied to our net income, not our gross income, which means we can deduct legitimate business expenses and are taxed on what’s left.
We had some business expenses last year, though fewer than in a typical year. My husband, a commercial illustrator, bought a large-format printer that was several thousand dollars and one initial batch of ink that was another cool thousand. I, an editor and writer, bought lots of paper, toner, and red pens.
We didn’t go to any conventions in 2018, so we had no travel expenses. (I traveled plenty to be with my mother while she was in hospice before she died, but that, of course, was not business related.) I didn’t buy a new computer though I sorely need one. Mine crashes on the regular, but I’ve worked out ways to keep it limping along — for now.
What I’m seeing all over — from so many other freelancers I know or follow on social media — is that this problem is much more widespread than just my husband and me.
We both have home offices, so we can claim a percentage of the mortgage and utility costs proportional to the square footage of those spaces. That’s nice. But speaking of that mortgage, we moved in the summer of 2017 and bought a house that cost more than the house we sold — a house that had been fully paid for. So, for the first time, we have a mortgage. We paid over $9,500 in mortgage interest in 2018, and I was so looking forward to being able to deduct that. In fact, the only reason I felt we could afford to take on such debt with this house in the first place was because I knew the mortgage interest would be deductible.
But, hey, guess what? Our mortgage interest is not deductible. It’s not a business expense; it’s just an expense, along with groceries and health care and utilities and firewood and insurance and gas and car repairs and all the umpty-billion things a family spends money on. What the new law cleverly did was raise the standard deduction so a lot of things that used to reduce your tax burden simply no longer do.
What it boils down to is that after self-employment tax is figured on our total income, that very same income is totted up again, the standard deduction is applied, and we’re taxed on the remainder.
Last year, our total tax liability amounted to not quite 11% of our total gross income, the money that came in the door. This year? Nearly 20%.