Have you ever wondered just exactly what a ‘write-off’ is? Well, a write-off is any legitimate expense that can be deducted from your taxable income on your tax return. For many, this is the trickiest part of filing their taxes, particularly because there is a fine line between which expenses are deductible and which ones are not. If you are still confused, or if you just want to learn more, take a look at the information below. Hopefully, it will help answer any questions you may have about what a write off is and how they work.
What is a tax write-off?
A tax write-off is a legitimate expense that can be claimed as a deduction and lower your taxable income. A tax write-off is also referred to as a tax deduction.
How does a tax write-off work?
While people often think of business expenses when thinking about tax write-offs, they can also be tax deductions or expenses that you are eligible to claim on your individual taxes which also reduce your personal taxable income. When you have your own self-employed business, a tax write-off related to your business is an expense directly related to conducting your business. The Internal Revenue Service (IRS) is responsible for administering and collecting taxes. When you file your tax return, the IRS uses your reported income minus your tax deductions (or tax-write offs) and credits to determine what tax bracket you are in and the tax rate your taxable income will be taxed. A tax bracket is applied to an income range.
For example let’s say when you file your taxes, your reported income is $50,000. With the standard deduction ($12,950 single for 2022, $13,850 single for 2023) your adjusted gross income would be $37,050 for 2022 or $36,150 for 2023. The standard deduction will lower your reported income and in turn lower your taxable income and your tax rate.
What is the benefit of a tax-write off?
The best benefit from a tax-write off is the reduction of your taxable income, which in turn lowers the taxes you have to pay.
Who can write-off expenses on their income taxes?
Individuals, self-employed, small businesses, and Corporations can write-off expenses on their taxes.
Individuals
Individuals can claim write-offs in the form of deductions and credits. A tax deduction is a result of a tax-deductible expense or exemption which reduces your taxable income. A common deduction on your federal income tax return is the standard deduction ($13,850 single, $27,700 married filing jointly for 2023 and $12,950 single, $25,900 married filing jointly for 2022), which is a deduction the IRS allows taxpayers based on income and filing status. Unlike tax deductions, tax credits are subtracted from and are a dollar-for-dollar reduction of the taxes you owe (not taxable income). For example, a $100 credit reduces your tax dollar-for-dollar ($100). On the other hand, a deduction reduces your taxable income by $100. The resulting amount of tax you save depends on your tax bracket. If you were in the 24% tax bracket, a $100 deduction reduces your taxes by $24. On the other hand, a $100 credit would reduce your taxes by $100. Common credits include the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit.
For some individuals, deductions and credits that can be claimed phase out at higher incomes. The IRS determines what expenses can be considered legitimate write-offs. Don’t worry about knowing which tax deductions and credits are deductible. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your answers.
Self-Employed
Many self-employed think that if they set their business up as a corporation or another type of business structure that they may get more tax write offs (tax deductions) than if they are set up as a sole proprietor, but this is a myth. If you are self-employed you can take many of the same business tax deductions as corporations which will lower your taxable self-employment income. As a sole proprietor you may be eligible for the 20% Qualified Business Income Deduction, which will be coupled with lower personal tax rates under tax reform. You can also deduct the full expense of business equipment up to $1,160,000 for 2023 in the first year you put the equipment in service, in some cases certain SUV heavy vehicles used for your business qualify. For 2023, if you placed a qualified sports utility vehicle in service you may be able to deduct up to $28,900.
If you are self-employed you may not know all of the different business deductions you are eligible for, but TurboTax Self-Employed will search tax deductions specific to your industry.
You can also easily track your business income, expenses, and mileage year-round with QuickBooks Self-Employed and easily import the information directly to your TurboTax Self-Employed tax return at tax-time.
Small Businesses
Businesses can be classified as small businesses based on revenue, sales, assets, or annual gross or net profits, but the number of employees is a common measurement used to classify small businesses. If you are considered a small business with employees like a privately owned partnership, corporation, or sole proprietorship with employees you will be able to deduct business expenses related to your employees like payroll expenses and other expenses directly related to running your business.
A simple way to reduce your possible income tax bill is to make sure you are claiming all the tax deductions available for your small business. As a small business owner it will be essential to keep good books and records of your business income and expenses to make sure not to miss out on any tax-write offs and cost you more money. Quickbooks can help you manage your business finances in one place to make sure you are prepared come tax time. Some common tax write-offs for small businesses include rent expenses, telephone and internet expenses, bank fees, and contract labor to name a few. Each business will have some expenses that are specific to their business or industry that can possibly be a tax write-off.
Corporations
Corporations are allowed to deduct business expenses that the IRS defines as ordinary and necessary business expenses. There are two types of business expenses: current expenses and capital expenses. Current expenses are expenses needed to keep the corporation running and these are fully tax deductible. While capital expenses are items such as investments or real estate that also qualify for deductions if purchased to generate income from the business. However, ultimately the IRS tax code determines which deductions a business does and does not qualify for.
A normal business deduction for all businesses are operating expenses which the business relies on to operate on a day-to-day basis such as rent, office supplies, and payroll expenses. Another customary business deduction for a corporation are employee expenses such as employer-sponsored health benefits, tuition reimbursement, bonuses, awards, sick leave, and employee salaries.
How much are tax write-offs worth?
The amount that a tax write-off is worth depends on several factors surrounding the deduction or credit. Many tax deductions and credits have limits which are prescribed by the tax provisions and the limits can depend on several factors like your filing status, income, and dependents.
In some situations the amount you can write-off may be limited based on your adjusted gross income such as student loan deduction which begins to phase out with income over $70,000 as a single person or $145,000 for married filing joint couples for 2022.
In some cases, it’s possible that taking the tax write-off would not be to your benefit. Say your total itemized deductions are less than the standard deduction amount for your filing status, it would be in your best interest to choose the standard deduction instead. Fortunately, when you file with TurboTax, it eliminates the guessing game and figures out which option will benefit you the most (standard deductions versus itemized) based on your entries.
What are some common tax write-offs?
While everyone will not qualify for every tax write-off, here is a list of some common tax write-offs:
- Standard deduction: A standard deduction is a deduction that is a specific dollar amount that reduces your taxable income. For tax year 2023, the standard deduction is $13,850 single and $27,700 married filing jointly (2022 the standard deduction is $12,950 single and $25,900 married filing jointly).
- Mortgage interest: You can write-off the interest you pay on the first $750,000 of home loans on homes purchased after December 15, 2017. For mortgages that existed as of December 14, 2017 the maximum mortgage interest deduction allowed is based on a loan amount of up to $1 million.
- Student loan interest: If you made payments on a qualified student loan in 2022 and have a modified adjusted gross income (MAGI) under $70,000 as a single or head of household filer or $145,000 as married filing jointly you can write off up to $2,500 of interest paid on the student loans.
- Donations to charities: If you made contributions to qualified 501(c)3 organizations you may qualify for a write off if you itemize your deductions.
- Medical and dental expenses: If you can itemize your deductions and your unreimbursed medical and dental expenses exceed 7.5% of your adjusted gross income you may qualify to deduct those costs as medical expenses.
- Traditional IRA contributions: If you made contributions to your traditional IRA and have a MAGI under a certain limit you may qualify to write off contributions up to $6,500if you’re under age 50 (or $$7,500 if you’re age 50 or older). You are able to make a contribution up until the tax deadline and reduce your taxable income for the tax year.
- Health savings account (HSA) contributions: If you qualify to contribute to an HSA you can write off contributions that you made to the account. For tax year 2022 you can contribute up to $3,850for an individual or up to $7,750 for a family.
- Self-Employed Business expenses: If you own and operate a self-employed business you’re allowed to write off certain expenses that are ordinary and necessary expenses related to running your business – think the home office deduction, business use of your car, supplies, and start-up cost to name a few.
What are some expenses that are non-deductible?
It is normal to have yearly expenses that don’t qualify as a tax write-off and are non-deductible. Also, it’s possible that an expense can be legitimate but excluded from being deductible on your taxes.
Here are some common expenses that you can’t deduct:
- Child support
- Alimony paid on divorce agreements entered into after Dec. 31, 2018
- Political contributions
- 529 contributions (no federal deduction but it may be deductible on a state tax return)
- Roth IRA contributions
What are some tricky tax deductions?
Knowing when an expense qualifies as tax write off or tax deduction can be trickier than it seems. Below are some expenses that can be deductible but they come with specific conditions:
Home Office
The home office deduction used to be an expense that self-employed business owners were hesitant to take, but if you have a dedicated space in your home where you conduct business, you should not hesitate to claim the home office deduction, which is a portion of your home expenses like rent or mortgage interest, property taxes and utilities based on the square footage of space in your home you use for your home office. The IRS also allows you to use the simplified home office deduction, which is up to $1,500 (up to 300 square feet at $5 per square foot), depending on how much space you use in your home.
Home Office Computer
If this is the only computer in your household you will need to calculate the percentage of time that you use the computer solely for business purposes.
Guard Dog
Believe it or not, a guard dog is considered a justifiable business expense as long as you only deduct the time the dog devoted to guard duties for your business.
Uniforms or Costume
If your costume or uniform is something you could wear outside your job, you shouldn’t write it off. If, however, it’s obvious you can only wear it for the duties of your specific job, then it qualifies as a write-off.
What are tax write-offs in a nutshell?
In a nutshell, a tax-write off is a legitimate expense that lowers your taxable income on your tax return. A tax write-off is commonly referred to as a tax deduction. Ultimately, the IRS determines what expenses can be considered a legitimate write-off.
Don’t worry about knowing these tax rules. Meet with a TurboTax Full Service expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.
