freelance writer

Can Freelancers Use Income Averaging on 1040s


While many business owners require an accountant's help with their taxes, for freelancers, filing with the IRS about their taxable income each year can be especially confusing. In a new series, tax guru Julian Block answers questions sent by self-employed writers. In the first part, he explains if freelancers will be permitted to average their income on their 2021 taxes and more.

Aug 5th 2021
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I receive tax queries from fellow freelance writers and from wannabes, that is, would-be writers. Most of the questions they send are pretty much the same.

Does the IRS agree that they can claim deductions in 2021 for 100 percent of certain expenses? Or permit them to take deductions in 2021 for only portions of those expenditures and then write off what’s left in in later years? Or never allow any deductions?

Most of the forthright answers I send back are pretty much the same. Yes, or no, or it all depends.

What follows in this first of five columns devoted to freelance book writers are unusual questions submitted by Waldo Lydecker, and the answers I sent back.

Waldo is taken with my first name, as I share it with his favorite Roman emperor, and wants to mention it in his question. I agreed.

Question. Julian, I’ve been searching on 2020’s version of the 1040 form for the line that allows individuals whose incomes unexpectedly skyrocket to avail themselves of income averaging in order to trim their taxes.

Where’s the line on which to claim averaging? Why are IRS pooh-bahs allowed to conceal averaging?

Answer. Waldo, set aside your fantasies, and return to reality. You misapprehend the current rules on how to calculate your tax tab. They require you to do it the same way that everyone else does; income averaging was abolished by the Tax Reform Act of 1986.

While there continues to be a limited exception that authorizes averaging for farmers and fishermen, I’m not aware that our lawmakers also approved an exception for someone who, as you later explain at length, wrote a steamy tell-all about the current president’s immediate predecessor.

What should be close to the top of your to-do list: pivot from obsessing about averaging to familiarizing yourself with uncomplicated and absolutely legal strategies long employed by writers to lose less to the IRS. For instance, stash as much of that advance money as is allowed into one of those tax-deferred retirement plans for authors and other self-employed individuals.

Question. Julian, previously, when people envious of writers pressed me to reveal how much I received from publishers of books and magazines, I just walked away. And with good reason. Usually, my 1040s reported embarrassingly anemic amounts.

Now, I stay put and regale them with the exciting news about 2021’s writing income. Several publishers are falling over themselves to acquire my next book. It’s about former president Donald John Trump.

Publishers need no reminders that the public can’t get enough of those kinds of books. My expectation: the highest bidder for it will transfer a seven-figure amount to my bank account.

Why, Julian, am I sure? Because my steamy tell-all highlights juicy details about Stephanie Clifford’s alleged assignation with a future president. Perhaps, Julian, you know her better as Stormy Daniels, a leading actress and director of films that are euphemistically sanitized as adult movies, and author of Full Disclosure, a book that discusses their affair in 2006.

Julian, I’m going to cut to the chase about the book, a sizzling tell-all that gets into the weeds on what went on when the future-and-one-time president relaxed, and explain why mine is more interesting to accounting and finance professionals.

Whereas her book ends with events that occur in 2006, mine begins a decade later. It enthralls readers with a blow-by-blow of what ensued when she became involved in October of 2016 with a presidential campaigner and his consigliere/attorney, Michael Cohen, a hireling who wore both hats when he arranged a hush-money payment of $130,000 to stop her disclosure of that alleged affair.

Any comeuppance for him? Yes, in spades, including an opportunity to sample Club Fed’s cuisine.

Julian, want to know what’s in my book about the 1040 form for 2016 that Stormy submitted? The details are titillating, especially for your so-called Dear Readers––just one of your many trite terms, Julian, that merit end dates.

Waldo, my frenemy, you’ve my blessings and encouragement to expand on how Stormy filled out her 1040. While you’re at it, I’ll pour myself some Merlot, a dry red wine that I’m especially keen on.

Julian, thanks. Whereas Full Disclosure understandably says nothing about its author’s 1040 for 2016, my book digs into whether she: incorrectly included the $130,000 in gross receipts on Schedule C (Profit or Loss From Business) and unnecessarily shelled out for self-employment taxes, as she wasn’t in the business of soliciting hush payments; or correctly included it in “other income” on line 21 of the 1040 and sidestepped those levies.  

Julian, something else. Don’t let this turn your head; if it turns out that you were the one who steered Stormy to line 21, I’ll say so in the book and its index.

What’s ahead, Dear Readers. Nothing more, mercifully, about Waldo’s book in part two.

It’ll discuss Code Section 183, which forbids write-offs for certain kinds of business losses claimed by freelancers on their Form 1040s. The rational for these restrictions: IRS alchemists continuously transform deductible losses from supposed “businesses” into nondeductible losses from “hobbies.”

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