What is a tax write off? If you don’t know what this means, you’re probably missing out on opportunities to significantly cut your taxes. It’s any expense that you can claim in your income tax return as a deduction, but you need to make sure that you qualify for these so you won’t have a bad experience when the IRS comes to audit. Read on to learn more.
In this article:
- What Is a Tax Write Off and How Does It Work?
- Who Can Claim Tax Write Offs?
- What Are The Broad Categories of Tax Write Offs?
- What Are Some Above-the-Line Tax Write Offs?
- What Are the 2018 Standard Tax Write Offs?
- What Are Some Itemized Tax Write Offs?
- Are All Mortgage Interests Deductible?
- Which Taxes That I Paid Can I Claim A Write Off For?
- Do The Self-Employed Get Special Write Offs?
- How Do I Compute For My Home Office Expense Write Off?
- Can Anyone Write Off Their Medical And Dental Expenses?
- How Much Tax Write Off For Donations Can I Avail Of?
- Somebody Told Me I Can Hire My Kids And Get A Write Off. Is This True?
- How About Losses From Theft And Casualties?
- Are Itemized Tax Write Offs Always Better Than The Standard Deduction?
What Is A Tax Write Off: Your Common Tax Write Off Questions Answered
What Is a Tax Write Off and How Does It Work?
Tax write offs are concessions given by the government to taxpayers so they can claim specific expenses as deductions from the amount of taxes they have to pay. Taxpayers can avail of certain tax write offs, more commonly referred to as ‘deductions’, if they meet certain criteria. These can be claimed regardless of whether one chooses to file his income tax return via the Itemized Method or decides to avail of the Fixed Standard Deduction.
Who Can Claim Tax Write Offs?
Different categories and kinds of write offs will apply to various individuals depending on their status, employment, preferred method for filing their income tax returns (standard or itemized), whether they have religiously kept the required receipts, and other details as specified in the tax laws.
What Are The Broad Categories Of Tax Write Offs?
Generally, tax write offs can be classified as either ‘above-the-line’ or ‘below-the-line.’ The adjusted gross income (AGI) delineates the two.
- ‘Above-the-line’ tax write offs are deducted from a taxpayer’s gross income. In effect, this reduces one’s adjusted gross income (AGI). These are deductions that both kinds of income tax filers (standard deduction claimants vs. itemized deductions claimants) can avail of.
- ‘Below-the-line’ tax write offs (or deductions), on the other hand, are deducted from the AGI. This lowers a taxpayer’s taxable income. Below-the-line deductions can be can be split in two:
- Standard Deduction – This depends on your ‘filing status,’ according to the IRS. These are: Single, Head of Household, Married Filing Jointly, Married Filing Separately, and Surviving Spouse. These are fixed values that taxpayers who fall under a particular status can claim. Taxpayers who opt to file their income tax returns by claiming this standard deduction can still claim applicable ‘above-the-line’ deductions.
- Itemized Deductions – There are deductions on a wide range of expenses including mortgage, home-office expenses, donations, etc.
What Are Some Above-The-Line Tax Write Offs?
There are several above-the-line write offs that taxpayers can claim. Among these:
- Contributions to health savings account — The government allows families to claim up to $6,500 against contributions while individuals can claim up to $3,300.
- Retirement-plan contributions — This includes 401(k) plans, a simplified employee pension (SEP), or some other qualified retirement plan. The IRS allows up to $5,500 to be deducted ($6,500 if you’re over 50). Meanwhile, the self-employed can claim up to $52,000 (or 25% of compensation) in SEP contributions for 2014.
- Student loan interest — Students can deduct up to $2,500 in interest on such loans.
- Legal fees and court costs — Under the Tax Cuts and Jobs Act (TCJA) of 2017, certain legal fees and court costs are acceptable as tax write offs or deductions, including: for discrimination suits, cases involving whistleblowers, etc.
- Moving expenses — Under the TCJA, this is now only available for members of the Armed Forces on active duty.
However, the Tax Cuts and Jobs Act of 2017 has also removed previously allowed deductions such as those on alimony and tuition/fees.
What Are The 2018 Standard Tax Write Offs?
For 2018 taxes (to be filed in 2019), the basic amounts, based on the Tax Cuts and Jobs Act of 2017 are:
- Single = $12,000
- Married Filing Jointly & Surviving Spouse = $24,000
- Head of Household = $18,000
- Married Filing Separately = $12,000
There is an additional standard deduction of $1,300 for those aged 65 and up, or blind. For the unmarried, the deduction is $1,600.
What Are Some Itemized Tax Write Offs?
There are eight common expenses that qualify for itemized tax write-offs. These are mortgage interest, payment for certain taxes, self-employment expenses, home office expenses, medical and dental expenses, charitable giving, salaries paid by sole proprietors to their kids, and casualty and theft losses.
The Itemized Method requires that you keep receipts and supporting documents as proof of claimable expenses. However, you don’t need to submit these receipts to the IRS on the day that you file your income tax return. There’s a possibility that you could later be audited, though. So keep your receipts handy and well-filed.
Are All Mortgage Interests Deductible?
You can deduct mortgage interest on your primary residence and a second home if it’s used primarily for personal use. For home mortgage interest, this only covers interest paid on a ceiling of $750,000 ($375,000 if MFS) on a new mortgage, taken out after December 14, 2017. Those who took out their mortgage before December 15, 2017, can claim home mortgage interest on up to $1,000,000 ($500,000 if MFS). For refinanced mortgage taken before December 15, 2017, the ceiling is also $1,000,000.
Which Taxes That I Paid Can I Claim A Write Off For?
Taxpayers can also claim write offs or deductions on some taxes that they have paid. Among these: state and local income taxes (SALT), state and local sales taxes, and real property taxes. This is only for a maximum total of $10,000 ($5,000 if MFS). One can also claim federal sales taxes, but only if one has not claimed SALT deductions. The IRS provides a sales tax calculator to aid taxpayers.
Do The Self-Employed Get Special Write Offs?
Self-employed individuals can get tax write offs for expenses incurred in relation to their being self-employed. Among deductible expenses are those for self-employment taxes, self-employed health insurance, and self-employed qualified retirement plans.
How Do I Compute For My Home Office Expense Write Off?
Employees who work from home are no longer eligible for home office tax write offs effective 2018 because the TCJA suspends miscellaneous itemized deductions subject to the 2% floor for this period. Self-employed individuals can still avail of these write offs, subject to specific conditions. In regard to your home office workspace, the law requires that this be used ‘exclusively and regularly’ as the taxpayer’s principal place of business, or as a place where the taxpayer meets or deals with clients, patients, etc. in the normal course of doing business.
The new and simple way to compute is to multiply the area (in square feet) in your home that’s used for business (maximum: 300 square feet) by $5. The standard way is to measure the total area of your home (in square feet) and the total area of your work areas (square feet). Then divide the business area by the area of your entire home. The result will be the percentage that you can deduct as the home office expense. For instance, if your home is 3,000 square feet and you use 600 sq. ft. of this for your home office operations, then you could deduct 20% (or .2) of your expenses.
Can Anyone Write Off Their Medical And Dental Expenses?
You can only deduct expenses which exceed 7.5% of your adjusted gross income/AGI. Below this, you can’t.
How Much Tax Write Off For Donations Can I Avail Of?
The Tax Cuts and Jobs Act of 2017 increased the allowable deduction for charitable contributions which may be in cash, property, or other goods valued at their fair market prices. Taxpayers can now contribute up to 60% of adjusted gross income, provided they give to a qualified tax-exempt organization.
Somebody Told Me I Can Hire My Kids And Get A Write Off. Is This True?
Salaries that sole proprietors pay their kids are valid write offs. The amount you pay your kids to encode, to answer the phone, or even to clean the office areas in the home can qualify as itemized deductions! What’s even better is that children under 18 are exempt from social security tax and not subject to federal unemployment tax if they are younger than 21 years old. This is a really smart way to shift income from the taxable income of the parent to the non-taxable income of the child, thereby lowering the family’s tax liability.
How About Losses From Theft And Casualties?
Under the TCJA, losses from casualty and theft can no longer be written off — except for losses from a federal disaster as declared by the President.
Are Itemized Tax Write Offs Always Better Than The Standard Deduction?
The short answer is “No.” As a general rule, the only time you should itemize is if your total deductible expenses can actually help you save more on taxes than the standard deduction. Otherwise, the whole thing would not be worth the extra effort.
Knowing what tax write offs you are entitled to is key to your enjoying these government-allowed deductions. The Tax Cuts and Jobs Act of 2017 had a profound impact on tax structure and rates. Consult a tax professional for advice on how to maximize the allowable write offs for your profession, business, or family.
Do you have other questions about what a tax write off is and how to file it? Tell us in the comments section below.
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