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 ( $12,550 single for 2021, $12,950 single for 2022) your adjusted gross income would be $37,450 in 2021 or $37,050 for 2022. The standard deduction will lower your reported income and in turn lower your taxable income and your tax rate.
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 2022 the standard deduction is $12,950 single and $25,900 married filing jointly ($12,550 single, $25,100 married filing jointly for tax year 2021 ).
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 $6,000 if you’re under age 50 (or $7,000 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 $3,650 for an individual or up to $7,300 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.