What does it mean to write something off on your taxes?

What does it mean to write something off on your taxes?

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.

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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 or, when they’re refundable, increase your refund. For example, if you owe the IRS $800 but you have $1,800 left from the second half of your $3,600 child tax credit for one child under 6, you’d get a refund of $1,000.

Deductions, on the other hand, don’t directly lower your bill. Instead, they let you “write off” qualifying expenses to lower your taxable income — that’s the portion of your earnings that the IRS can claim a percentage of.

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How Do Write-Offs Save You Money?

Bench Accounting gives the example of an independent contractor who earned $60,000 in 2021:

  • The self-employment tax of 15.3% is $9,180

  • The income tax based on the contractor’s individual tax rate is $4,865

  • The total tax bill is $14,045

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 to $8,045, the way a tax credit would have, but it does provide a lot of relief:

  • The self-employment tax falls to $8,262

  • The income tax falls to $4,200

  • The total tax bill falls to $12,462 for savings of $1,583

Standard Deduction vs. Itemizing Your Write-Offs

The standard deduction is a no-questions-asked, flat-rate deduction that will lower your taxable income by $12,550 in 2021 — $25,100 for married couples filing jointly. You can either take the standard deduction or you can itemize your deductions — that is, to 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 — if you and a friend discuss a work project over steaks and lobster tails, for example, that doesn’t qualify as a business dinner.

Unusual deductions like that one are red flags that can trigger IRS audits. If you’re audited, you’ll have to show receipts and other evidence to prove the expenses you’re attempting to write off. The standard deduction, on the other hand, is impossible to get wrong.

So, What Are Some of the Things I Can Write Off?

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 minutia — but you might be shortchanging yourself for the sake of convenience. According to Turbo Tax, those who itemized claimed $1.2 trillion in tax deductions last year while the standard deduction shaved off only $747 billion in combined taxable income.

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. If you claim the home office deduction, for example, you can deduct only the space in your home that you use exclusively for work.

Itemized deductions might also include write-offs for gambling losses, mortgage interest, charitable contributions, real estate taxes and more. There are also several education deductions, investment deductions and healthcare deductions.

Take the standard deduction if you can, itemize if you must, and seek help if you’re not sure.

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This article originally appeared on GOBankingRates.com: What Does It Mean To Write Something Off on Your Taxes?

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