What Is a Tax Write-Off?
The goal of tax season is to pay as little money as legally possible to the government while keeping as much of your income as you can for yourself. Among the best means to achieve that end are write-offs. By knowing what to write off in which situations, average taxpayers can save hundreds or even thousands of dollars, either by lowering their tax bills or by topping off their refunds.
Here’s what you need to know about tax write-offs.
Check Out: What To Do If You Owe Back Taxes to the IRS
Don’t Confuse Tax Write-Offs With Tax Credits
Tax write-offs are commonly called tax deductions, which is fine — the two terms are interchangeable. But some people use the terms “deductions” or “write-offs” synonymously with “tax credits” — and those are two very different things.
Tax credits lower your tax bill on a dollar-for-dollar basis and, when they’re refundable, increase your refund. For example, if you owe the IRS $800 but you have a $2,000 child tax credit, $1,600 of which is refundable, you’d get a refund of $800.
Deductions, on the other hand, don’t directly lower your bill. Instead, they let you “write off” qualifying expenses to lower your taxable income.
How Do Tax Write-Offs Work?
To demonstrate how tax write-offs work, Bench Accounting gave the example of an independent contractor who earned $60,000 in 2023:
The self-employment tax of 15.3% is $8,478. (In general, only 92.35% of self-employment income is subject to self-employment tax.)
The income tax, based on the tax rate for the contractor’s tax bracket, is $4,865.
The total tax bill is $13,343.
After finding $6,000 in qualifying deductions, the freelancer’s taxable income drops to $54,000, which changes the entire equation. It doesn’t lower the tax bill the way a tax credit would have, but it does provide a lot of relief:
The self-employment tax falls to $7,630.
The income tax falls to $4,200.
The total tax bill falls to $11,830 for a savings of $1,513.
Does a Tax Write-Off Mean It’s Free?
No. It simply reduces your taxable income. If you earn $60,000 in 2024, you itemize deductions and you take a $4,000 tax deduction for real estate taxes, the write-off doesn’t reimburse you the $4,000. However, it does reduce your taxable income by $4,000 — money that would have been taxed at the 22% tax rate. That, in turn, saves you $880 in taxes ($4,000 x 0.22 = $880).
Standard Deduction vs. Itemizing Your Write-Offs
The standard deduction is a flat-rate deduction that will lower your taxable income by $13,850 for the 2023 tax year ($27,700 for married joint filers) and $14,600 ($29,299 for married joint filers) for the 2024 tax year. You can either take the standard deduction or itemize your deductions — that is, report and tally your individual write-offs one by one — but you can’t do both.
It makes sense to itemize only if your combined write-offs exceed the standard deduction. Itemizing is a much more tedious process that leaves a lot of room for misreporting, which can trigger an IRS audit. If you’re audited, you’ll have to show receipts and other evidence to prove the expenses you’re attempting to write off.
So, What Are Some of the Things I Can Write Off?
The IRS allows business deductions for your home and car, as well as deductions for business expenses, but strict rules govern what does and doesn’t qualify. Itemized deductions might also include write-offs for gambling losses, mortgage interest, charitable contributions, real estate taxes, state sales tax and reinvested dividends. There are also deductions for education, investing and healthcare.
If it makes sense for you to itemize, it might also make sense to spring for professional tax help. Not only can you put yourself in the IRS’ crosshairs by attempting to write off non-qualifying deductions, but you can also skip over lucrative deductions that you were entitled to claim. That includes things like deductions for state sales tax, reinvested dividends, student loan interest and mortgage refi points.
If you take the standard deduction, you can skip over all of that minutiae — but you might be shortchanging yourself for the sake of convenience.
In the end, the best strategy is the one that leaves you paying the least amount of tax. Take the standard deduction if you can, itemize if you must and seek help if you’re not sure.
FAQ
The more you know about personal income tax, the better prepared you'll be at tax time. The answers to these frequently asked questions should help.
What is the FICA tax rate?
The FICA tax rate is 15.3% of your gross wages. The tax is divided between Social Security, which receives 6.2%, and Medicare, which receives 1.45%. If you're a W-2 employee, your employer pays half.
What is the capital gains tax rate?
Short-term capital gains are taxed at your federal income tax rate. Long-term capital gains tax rates vary from 0% to 20%, depending on your income.
Where can I find IRS tax brackets?
Is it better to itemize or take the standard deduction on my federal income tax return?
You’ll have to calculate your deductions both ways to see which is the most beneficial. The 2023 tax write-off for people who take the standard deduction is $13,850 for single and individual filers, $27,700 for married joint filers and $20,800 for heads of household.
How long does it take to get a tax refund?
Most taxpayers receive their refunds within 21 days, according to the IRS, but how long it takes to get your refund depends on whether you request a check or direct deposit (direct deposit is faster) and whether your return requires additional review.
Daria Uhlig and Cynthia Measom contributed to the reporting of this article.
This article originally appeared on GOBankingRates.com: What Is a Tax Write-Off?
