Its that time of year again, when all Americans must file taxes and hope for returns. And for most Americans, the process is fairly straight forward, the same cannot be said for insurance agents, especially in relation to tax deductions. That’s why we have compiled some expert tax advice below, to ensure you file as accurately as possible and receive the best return possible.
Should Insurance Agents Work with a Tax Professional?
“Insurance agents and their agencies are just like any other small business—unless you are a trained tax professional, you could be missing out on key tax deductions and other tax breaks,” according to Michael Cohen, president of Bering Insurance Partners.
For this reason, Cohen recommends working with a tax professional who knows what they’re doing. For example, it could be something as minute as making sure expenses go into the correct category, or how and when to record certain types of revenue.
Another expert, tax accountant Eric J. Nisall says some people may be taking tax deductions for insurance agents that aren’t applicable due to their employment category. “If you’re an employee of an insurance agency, you don’t get any tax deductions for work-related expenses, as IRS Form 2106 Employee Business Expenses is no longer allowed for this particular job type.”
Of course, a self-employed insurance agent won’t have this issue since their expenses will be considered business expenses, assuming they maintain proper records. Nisall says all business expenses will reduce your net income, reducing your case for self-employment tax, as well as your taxable income for federal and state income taxes. “A tax professional can help you maximize this net income reduction.”
Mike Jesowshek, CPA and speaker on the Small Business Tax Savings Podcast, adds that a tax professional can help you understand and take advantage of pre-tax dollars (money that has not yet been taxed) vs. after-tax dollars.
“You lose out every time you spend after-tax dollars that could have been pre-tax dollars,” Jesowshek explains. “As a self-employed insurance agent, you have a great opportunity to take advantage of deductions available to you by understanding this distinction.”
For example, when setting up your home office, ensure all related furniture and supplies are purchased through your business, that way you can claim those expenses so they are deducted prior to being taxed.
“The goal should always be to strategize ways to move your after-tax dollar spending to pre-tax dollar spending by having a specific business purpose,” says Jesowshek.
There is a myriad of tax deductions available for insurance agents. Exactly what can an independent contractor write off for their agency? Continue reading to see what experts in insurance and tax preparation recommend.
Top 4 Tax Deductions for Insurance Agents
“I would say the number-one rule to follow is to make sure you’re deducting business expenses, not personal ones,” says Cohen. This may seem obvious, but if you don’t keep clear records of your expenses, things can easily get mixed up. “Be sure to maintain separate accounts for your business and personal dealings.”
Below are for important deductions for insurance agents to keep in mind when filing taxes.
1. License & Continuing Education
“Your licensing requirements and continuing education (including the work/education components of professional conferences) are deductible since you cannot do your job without them,” says Nisall.
Alex Williams, a certified financial planner and CFO of FindThisBest, stresses the importance of licenses as tax deductions for insurance agents. “The application, exam and processing fee for insurance licenses can get quite expensive. The cost of getting just one license can easily reach $150, so it’s key that you claim any licensing fees you incur.”
Agent license renewal fees can be deducted in a similar fashion. “This is an important deduction, especially for agents who aren’t making a lot of income but still have to pay taxes.”
2. Software
Nisall says that any software you’re using that is related to your insurance agent duties is appropriate to deduct. “Claim the digital tools that help you write policies, manage your client list, store work files, communicate with clients and peers, and so on.”
3. Home Office
Home office expenses are some of the most strictly monitored deductible expenses. Therefore, agents should ensure their home office space is dedicated only for work purposes and used regularly. Your home office tax deduction amounts can be calculated by multiplying the square footage of your home workspace by $5, for an IRS maximum allowed 300 square feet, giving you a potential deduction of up to $1,500!
4. Insurance
A seemingly obvious deductible item for insurance agents, Jaime Arias, insurance agent and VP of marketing at Dynamic Insurance Solutions, reminds agents that their very own product is tax deductible. “Insurance agencies generally need at the very least an errors and omissions policy—the cost of such business insurance is tax deductible.”
Insurance Deductibles That Are NOT Deductible
Now that we’ve discussed items that you can deduct from your taxes, let’s go over a few that you cannot include in your tax deductions.
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Life insurance premiums when you are the beneficiary
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Legal violations such as parking tickets and court fees
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Personal hygiene expenses like haircuts, clothing, and dry cleaning (unless for a uniform)
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Political contributions
Cohen notes that political contributions may not be obvious at first glance because you may belong to a professional organization that is using member dues to fund some sort of political activity.
“The organization will usually make you aware of this on your annual statement,” Cohen explains. “So pay close attention and make sure you’re not counting that portion toward your deductible expenses.”
Top 4 Tools for Keeping Up with Tax Deductions
“It’s important to keep track of your income and expenses. It will not only make tax filing easier, but it will also save money if you use a tax professional because they won’t have to charge you for time spent combing through your records,” remarks Nisall.
Arias adds that it’s important to remember that the IRS can also review records for the three years prior to the filing year in the event of an audit. And if they find significant errors, they can go back up to six years. “If a self-employed insurance agent doesn’t have proper documentation for their expenses, they may find themselves in a precarious position with the tax agency.”
Below are 4 tools experts recommend to help you keep track of tax-related items.
1. Expensify
Williams says Expensify is one of the best tools for monitoring expenses and tax deductions. You can track everyday expenses, scan and input receipts, and create reports. It’s a robust app with powerful tracking features, and includes extra functionality, like reimbursements for employees.
2. QuickBooks Online
Nisall says a program designed for bookkeeping purposes, such as QuickBooks Online, can help keep your business expenses clearly categorized and separate from your personal expenses.
3. TaxAct Express
“One great tool to help insurance agents monitor their deductions is TaxAct Express,” says Greg Rozdeba, president of Dundas Life. “The app has reasonable prices and offers useful features. Agents can quickly check the list of deductions available to them according to their specific job role and even cross off the ones they’ve already taken. They can also easily import tax data from the previous year.”
4. Excel
While the above programs are highly focused and useful tools for tracking your tax deductible income and expenses, you can still always opt for a tool you likely already have access to in Microsoft Excel. Nisall notes that “Depending on your needs, even a simple spreadsheet program can get the job done, especially if you’re just keeping track of income and expenses.”
Like any other profession, it pays for insurance agents to be aware of the tools and resources available when filing their taxes each year. By following the above recommendations, along with consulting a tax expert, you can maximize your taxes year after year!
Keystone Advisors is always here to support you with any questions you may have. You can reach agent support at (346) 233-1992 or email us at agentsupport@keystonema.com