How to use this Page

Ahhhh! Tax day is coming! Yes, once again April 15 is almost upon us. Hopefully you’ve already filed your taxes for 2015 by now, or you’re about to. And if you’re a writer (or are otherwise self-employed), hopefully you’re also deducting your writing expenses.

OK, so I’m no tax expert, but I have been filing my own taxes for my entire working life. And I only started using TurboTax when things got a little more complicated — namely, when I started treating writing like a business.

What does that mean? How do you distinguish writing as a hobby from writing as a business? Look deep within yourself for the answer: Are you trying to make a go of a full-time professional writing career? Or are you writing for fun and an occasional story sale?

If you want to write for a living, writing is your business, even if you have a day job that helps pay the bills. If you are starting to sell stories or novels and getting paid for your work, it is definitely a business. In either of these situations, you should consider keeping track of all your writing-related expenses and claiming them as deductions on your tax form, typically using Schedule C (Form 1040) Profit or Loss from Business. In the early years, possibly longer, this is probably going to be more losses than profits, but that’s okay, as long as its not from lack of trying to earn money and you can demonstrate your intentions.

What writing-related expenses can you deduct? You’d be surprised. If you’re attending workshops, conferences, or conventions, you can deduct some or all of your travel and meal expenses. If you’re a writer, you’d better be a reader, so deduct those books, especially the ones you buy for research. (Warning: This may lead to an increase in the number of books you own, because once you know you can claim that purchase as a deduction…) Meals and drinks with other writers can also be deducted, as well as entertainment expenses! Did you buy a new laptop that is exclusively (or mainly) used for writing? Go ahead and deduct all or part of that purchase.

Look, don’t be shady about it. Only you know if these are legitimate writing-related purchases, and you should hold onto receipts and documentation to justify it, should you ever be unfortunate enough to face an audit. But don’t be nervous about it either; you’re entitled to these credits for the considerable time, work, and money you’re investing in your career. Because once you start selling stories and books, the IRS will most certainly be happy to shave off a significant portion of your earnings in income tax. Filing your self-employment taxes can seem intimidating, but Writer’s Digest has a good overview, and you can find lots of information online or consult with a tax professional.

But here’s my one big tip if you’re deducting your writing expenses regularly, which I wish I had thought of years ago: If you can, dedicate one of your credit cards to only writing-related purchases and activities. My wife suggested it to me last year, and this is the first full year in which I’ve implemented it, and wow, it made tracking my expenses so much easier! Everything is in one place and nearly itemized and organized by categories, such as travel, meals, purchases, etc. in the yearly report.

Having this system cut my tax preparation time by more than half, because I wasn’t digging around multiple credit card statements, receipts, and e-mails to account for everything. I typically also maintain an Excel spreadsheet throughout the year, which I forget to update until tax time, and the credit card statement more or less replaced that because I made a habit of charging everything. No fuss, no muss.

Do you have any tax “hacks” like this that work for you? Other tips or suggestions? Drop them in the comments below. And I wish you many happy returns!

By Irina A. Telyukova

In the United States, around 25% of households tend have a substantial amount of expensive credit card debt that they carry over multiple months or even years, while also holding significant liquid assets, i.e. balances in checking and savings accounts.

For example, in 2001 data, such households paid an average 14% interest rate on the credit card, while earning nearly no return on the bank accounts. A median such household had $3800 in credit card debt, and $3000 in the bank.  The average amounts were about $5800 and $7200, respectively.  This behavior is quite persistent with age, as the picture below shows. It is also persistent over time, at least over the last two decades. The statistics for 2010 are very close to those for 2001.

It may seem that given the cost of revolving credit card debt, people should pay it off if they have any money in the bank. Hence, the phenomenon has been termed the “credit card debt puzzle”. Much of the discussion of it in the literature interpreted it as evidence that people lack self-control, or that they lack the financial sophistication to plan properly. In my study, I instead focused on a more familiar idea: that people hold on to money in the bank because they may need it for expenses for which credit cannot be used, and such expenses could be large and unexpected.  Not only do we pay our rents and mortgages still largely by check or electronic payment from the bank, but if we have a large car or home repair to take care of, the contractor might give preferential pricing to a cash payment or simply not accept credit cards. Indeed I find that homeowners are more likely to simultaneously have debt and money in the bank, and that home repairs are an important source of large and unpredictable expenses for most households. Then, even if a household has credit card debt, it may not be optimal to draw down the bank account to zero to repay the debt.  Incidentally, this idea has been advanced in the past by those who have studied the same behavior on the side of firms.

The story is intuitive; the difficult part is measuring how well this explanation can account for the puzzle, because we do not have good data on how people pay for things during a typical month, and because it is difficult to disentangle which expenses are unpredictable. Nevertheless, using several household surveys and a model of household portfolio choice, I measured both typical monthly liquid expenses (i.e. those done by cash, check, debit and other ways that require the bank account to have a positive balance), and the extent of uncertainty in them. I find that for the median person, there appears to be enough uncertainty to warrant holding on the order of $3,000 of liquid assets, even if she has credit card debt as well. In other words, many people who simultaneously have credit card debt and money in the bank are behaving without violation of self-control or rationality, under the constraint that they do not have enough money both to pay off their debt and attend to their expected monthly expense needs.

While the story accounts for the median amount of money held in the bank by those who also have credit card debt, the average household has a lot more money in the bank, and more money than credit card debt. This means that there are people who have very large amounts of liquid assets while still revolving credit card debt. While such households may face more severe risks than the average case that I measured, and while some may hold money in the bank because they foresee a possibility of a job loss and want to be able to pay at least their average expenses, it does suggest that some people may be able to improve their financial positions by examining their bank and credit card balances, and the interest costs that they pay on the credit card debt, to see if they can pay off some of their debt using their money in the bank.

Irina A. Telyukova is an assistant professor of economics at the University of California, San Diego. Her research focuses on different aspects of household saving. She has several publications on credit card debt and money demand. Her current research is about the use of home equity in retirement, in the United States and across countries, including a study about reverse mortgages. She is the author of the paper ‘Household Need for Liquidity and the Credit Card Debt Puzzle’, which appears in The Review of Economic Studies.

The Review of Economic Studies aims to encourage research in theoretical and applied economics, especially by young economists. It is widely recognised as one of the core top-five economics journal, with a reputation for publishing path-breaking papers, and is essential reading for economists.

Subscribe to the OUPblog via email or RSS.
Subscribe to only business and economics articles on the OUPblog via email or RSS.
Image Credits: (1) Graph produced by the author. Do not reproduce without permission. (2) Credit Card. By Gökhan ARICI, iStockphoto

The post Why don’t people pay off credit card debt? appeared first on OUPblog.