Understanding Tax Deductions For Therapists
Self-employed therapists can save significant money on their taxes by understanding the basics of tax deductions. They might be able to recoup some of the business expenses of their practice or otherwise offset the costs of doing business. It is important to investigate all available options when filing taxes thoroughly, and it may be beneficial to talk to a tax professional before filing. In all cases, saving receipts, documenting expenses carefully, and reviewing costs are important.
Common tax deductions for therapists: Itemized deductions vs. business deductions
Before diving into different deductions that may apply to you, it is important to distinguish between itemized deductions and business deductions, which is a common point of confusion.
Itemized deductions are deductions on your personal taxes, commonly including mortgage interest, real estate taxes, or medical costs. They are related to personal expenses, not costs related to your practice. When filing your taxes, you can choose to itemize your personal deductions or take a flat-rate standard deduction.
Business deductions are typically more complex and apply to expenses related to your practice. They might include office expenses, professional memberships, travel, or specialized software. If your practice is a pass-through organization, like a sole proprietorship or LLC filing as a sole proprietorship, both your personal deductions and business deductions are filed together on Form 1040. Schedule A is used for personal deductions, and Schedule C is used for business deductions.
The most significant tax deductions for therapists
The most important tax deductions for therapists to know about will typically be filed on Schedule C. Some of the more common deductions are listed below:
Professional memberships and education
Membership fees for professional organizations (ACA, APA, NBCC, etc.) are typically tax deductible. Those who own a practice can also likely deduct the cost of membership in their local chamber of commerce or any public organization related to counseling. In addition, many practitioners may be able to deduct continuing education costs. Continuing education must help improve or maintain the skills necessary to practice therapy. It is likely that the costs of coursework, books, learning supplies, and supervision expenses are all deductible.
Office expenses
If you practice in an office separate from your home, the entire cost of rent for your office space and utilities is deductible. Those who work from home can also deduct office expenses but with some additional restrictions. Those who wish to deduct a home office expense must have a home office separate from the rest of the home, which is used primarily for work, is regularly used for work, and is your most-used office space.
Deducting home office rent can be done in one of two ways: the regular or simplified method. The regular method compares your office's square footage to your home's total square footage. For example, if you have a home that is 2,500 square feet in total and an office that is 200 square feet, you could deduct up to 8% (200/2500 = 0.08 or 8%) of your home’s mortgage or rent—plus utilities—fo the year. The simplified method uses a flat rate of $5 per square foot of your home dedicated to an office, up to 300 square feet. See this IRS guide for more information.
Bank, credit card, and financial management fees
If your practice accepts payment via credit card, you’re likely aware of the significant impact of credit card processing fees. Credit card fees are paid directly to the card issuer and cover the costs of facilitating the transaction. As of 2024, the average processing fee is between 1.5 and 3.5% of the total transaction, making credit card fees a substantial tax write-off.
You can also likely deduct some expenses from business-related credit card spending. Typically, account fees for a business credit card, as well as interest generated, are deductible. It is important to note that only fees and interest related to direct business costs qualify for a tax deduction. Similarly, bank fees like overdraft and maintenance fees can also likely be deducted as a cost of doing business.
Practice-related software
Most therapists have, at a minimum, electronic record-keeping software to manage session notes and store client information, but many therapists invest in significantly more complex software solutions. Your practice-management software may be a full software suite or separate programs to manage billing, scheduling, messaging, or telehealth. The cost to purchase and maintain this software is typically deductible. Some software collects a percentage of revenue when the client pays. As with credit card fees, these costs are usually deductible.
Mileage and vehicle use
If you regularly use your car in your practice, like if you visit clients at home or see clients in a facility that is different from the one you usually practice in, it is likely that your vehicle’s expenses can be deducted. You can choose one of two ways to deduct your car: by taking the mileage rate or calculating actual costs. For 2023, the IRS issued a standard mileage rate of 65.5 cents per mile. To calculate your deduction in dollars, multiply the miles traveled exclusively for work by the standard rate, then divide the total by 100. For example, if you traveled 1,500 miles for work over the year, you can deduct up to $982.50 from your taxes (65.5*1500 = 98,250, 98,250/100 = 982.50).
To calculate using the actual expenses method, determine the total miles you drove in the tax year. Include both business and personal use of your vehicle. Then, divide the miles you drove exclusively for work by the total miles you drove in the year. Multiply the answer by 100 to obtain a percentage, and use that percentage to determine how much of your total vehicle expenses are deductible. Common vehicle expenses include fuel, lease payments, oil changes, parking fees, repairs, insurance, and depreciation.
For example, if you spent $6,500 on vehicle expenses, drove 10,000 miles total, and 1,500 miles were for work, you can claim 15% of your total vehicle expenses for that tax year (1500/10000 = 0.15, 0.15*100 = 15%). Based on your vehicle spending for that year, you would be able to deduct approximately $975
Meals
Deducting business meals as an expense became more complicated following the passage of the 2017 Tax Cuts and Jobs Act, which effectively eliminated deductible entertainment expenses, the category under which meals were previously placed. However, the IRS has clarified that qualifying meals may be deducted. To qualify, a meal generally needs to meet these criteria:
- The meal is purchased from a restaurant, either takeout or sit-down. Ingredients for meal prep or later consumption cannot be counted.
- The meal is purchased during a business trip or shared with a business associate.
- The business associate is someone you could reasonably expect to engage with your business. For therapists, that might mean a lunch dedicated to discussing supervision with a student or meeting with a colleague to discuss business exclusively.
- The meal must not be lavish or extravagant. High-value, fancy meals are generally not deductible.
The QBI deduction
Getting tax advice or support for tax deductions for therapists during tax season
Many financial experts recommend seeking the services of a qualified accountant or tax preparer when filing taxes. A professional can help reduce the stress of calculating tax liabilities and offer peace of mind when filing the final tax return. You might also consider using this time to seek professional support from a therapist or counselor. Taxes are far from the only stressor associated with practicing therapy, and it can be helpful to check in with another mental health professional proactively. If your schedule is tight or you don’t want to travel to an office, you might consider online therapy as a viable alternative.
Effectiveness of getting mental health support through online therapy
Online therapists practice using the same evidence-based tools as traditional therapists. If stress is a concern, they can use techniques like cognitive behavioral therapy to help you manage stressful thoughts or acceptance and commitment therapy to help you overcome challenging emotions. Whatever your need, online therapy could likely be a viable option to help you find strength, peace, and harmony in your practice and life.
Takeaway
Tax advice about tax deductions for therapists: What deduction is applicable for an individual practicing therapist during tax season?
During tax season, an individual practicing therapist may deduct a variety of tax-deductible expenses related to their legal and professional fees and financial management fees for their business. Therapist tax deductions may include:
- Fees for accountants preparing business tax returns and for financial advice;
- Fees for bookkeepers handling financial records;
- Fees for their own attorney or legal services related to therapy practice;
- Fees for business consultants;
- Fees for a tax professional or tax preparer for filing your Schedule C;
- Fee for a business advisor;
- Fees for a tax advisor who gives advice on business structure, deductions, and tax bill preparation.
Do therapists qualify for QBI deduction?
Yes. The qualified business income (QBI) deduction lets most self-employed therapists deduct up to 20% of their income.
Can I use my personal cell phone for business as a therapist?
People have different opinions about whether therapists should give their personal cell phone numbers to clients. Some argue that it's a bad idea because it could compromise secrecy. Others believe it's acceptable for the convenience it provides between the client and the therapist. While the decision to share your personal contact number with a client for business purposes is up to you, using a separate cell phone for your therapy practice is recommended. Consider using a HIPAA-compliant phone or electronic health record and PMS for client appointments and billing.
For tax purposes, according to the Internal Revenue Service (IRS), if a therapist works in a clinic and the employer asks them to use their personal cell phones for work and reimburses part of the phone bill, it is usually not taxable, meaning the therapist does not need to pay taxes on that amount. However, if a therapist is self-employed and runs their own practice, they may deduct a portion of their cell phone bill as a business expense on their income tax return. They may also be required to keep records to support the business use percentage.
What is tax-deductible as a self-employed therapist?
During tax season, mental health professionals who run their own therapy practice may deduct many business expenses as a tax write-off to lower their taxable income and increase tax savings. Here are some of the potential tax-deductible business expenses for therapists:
- Legal and professional fees;
- Office and business expenses (office space, office supplies such as art therapy supplies, internet, business meals);
- Continuing education;
- Travel expenses (parking fees, transportation expenses);
- Professional membership fees;
- Advertising expenses;
- Home office deduction and rent or mortgage payments (for business purposes);
- Overdraft fees as business expenses.
Keep in mind that all expenses not related to business may not be considered deductible. This includes but is not limited to personal therapy and medical and dental fees.
Are professional fees 100% deductible?
Money spent or fees for an accountant, bookkeeper, or other financial professional may be deductible for tax purposes as long as the actual expenses are documented correctly and constitute legal, “ordinary and necessary” items.
What are the IRS rules for home office deduction?
Small business owners operating in the service trade, including therapy practitioners who use their homes for practice, may qualify for a home office deduction to help reduce their tax burden.
At tax time, small business owners typically have two options when computing their tax deductions. First is the home office regular method, where a therapist divides the home expenses between personal and business use. This may have a bigger tax write-off if a large portion of the home is used for business. The home office simplified method, on the other hand, is simply multiplying the space used for business by $5 per square foot.
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