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

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 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. The continuing education must help improve or maintain 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 are 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, is used primarily for work, is used regularly for work, and is your most-used office space. 

Deducting home office rent can be done 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 - for 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 this 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

The qualified business income (QBI) deduction lets most self-employed therapists deduct up to 20% of their income. As of 2024, any therapist whose practice generates less than $182,100 (single) or $364,200 (married filing jointly) in taxable income is eligible for the QBI deduction. Single taxpayers with business incomes of $182,100 and $232,100 or married taxpayers between $364,200 and $464,200 will qualify for a partial deduction. Check out this IRS guide for more information about the QBI.

Getting support during tax time

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. 

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

Everyone wants to get more money back on their taxes during tax time, especially those who run their own business. Self-employed therapists not only manage the challenges of running a practice but also must consider how to manage the business's expenses best. Several deductions provide potential tax relief to therapists, and at least one or two likely apply to nearly everyone. Learning about deductions is important, but many experts recommend consulting with an accountant or qualified financial professional before filing taxes. The tax code is enormously complex, and the help of a professional will likely be helpful.