With less than a week til tax returns are due, it’s time to buckle down and get them done if you haven’t already. But in your haste, it’s important not to miss any deductions or credits that could lower your total tax bill, and increase your refund, if you’re on that side of the fence.
What Exactly is a Write-Off?
The term ‘write-off’ gets thrown around a lot, especially by people who seem to know what they’re talking about. Everyone seems to know that write-offs are good for your wallet, but maybe don’t know exactly what they are or how they work. The way some people talk about them, you could even be forgiven for wondering if tax write-offs are illegal!
Basically a write-off is something you’ve spent money on that reduces your taxable income. As a real basic example, let’s say you made $50,000 last year. You also paid $7,000 in interest on your mortgage, which is a deductible expense. As long as you claim that $7,000 on your tax return, you’d only be taxed on $43,000 of your $50,000 income. Depending on what tax bracket you ended up in, that deduction could lower your tax bill by over $1000! And no, tax write-offs are not illegal, as long as you are only deducting expenses that the IRS allows. For example, a new boat is probably not going to be an allowable deduction. However, there are several common expenses that are allowable deductions that you definitely don’t want to leave on the table.
Mortgage Interest
For many home-owners, the mortgage interest deduction is their single largest tax write-off, easily taking several thousand dollars off their taxable income. What you may not be aware of, however, is that this deduction includes not only the interest you pay on your primary mortgage, but often the interest paid on home equity loans as well!
Medical Expenses
Any medical bills that exceed 7.5% of your adjusted gross income are also deductible. It is important that you only deduct those expenses that are above this threshold (otherwise your tax write-off would be illegal), but even deducting part of your medical expenses can make a big difference in your final tax bill.
In addition to your medical bills, you may also be able to deduct health insurance premiums, if you pay them yourself. If you get health insurance through your employer, this probably doesn’t apply to you, since your portion of premiums is paid pre-tax already. However, if you’re buying health insurance on your own, if you’re self-employed for example, then 100% of your premiums are deductible.
Charitable Gifts
If you’ve given to charity, you likely can deduct these gifts from your income. This includes non-cash gifts, such as a vehicle donation or even items you drop off at a thrift store.
A word of caution regarding writing off charitable gifts: this is one category that often gets abused, and the IRS knows it. Sometimes tax filers get a little too creative in what constitutes as charity. Be sure to keep documentation of all your charitable gifts. Also, when claiming non-cash gifts, be careful to only claim the ‘fair market value’ of your donation. When you donate your 20 year old pickup truck, don’t try to claim the original selling price! Mostly, use common sense here, but the IRS has published a list of guidelines regarding charitable write-offs.
State Taxes
The federal government allows you to deduct either state income taxes or state sales taxes on your federal return. Especially if you live in a state with a high income tax, this is one deduction that you can’t afford to miss. Even if your state has no income tax, however, you might be surprised how much sales tax adds up, especially if you’ve made a large purchase in the last year.
Tax Write-Offs For Small Business Owners
If you’re one of the over 20 million small business owners in the US, you are entitled to a number of additional tax write-offs. In short, virtually any expense you make in the process of earning income is deductible, although there are some limits to certain deductions such as dining and gifts.
One of the most basic business deductions is the cost of goods. If you sell a cake, for example, you can deduct the cost of all the ingredients that went into the cake. Likewise, if you are simply retailing an item, you deduct the original cost of the item so that you are only paying taxes on your profit.
Marketing is another common deduction. Any advertising, signage, or promotional materials you purchase is deductible as a business expense.
At the end of the year, it’s easy to forget that any use of your personal vehicle for business use is also tax deductible. And although $0.53 per mile might not sound like, even after a few hundred miles it can really start adding up!
Similar to using a personal vehicle, using part of your home in the course of your business may also entitle you to a write-off of a portion of all your home expenses. This deduction is calculated in proportion to the amount of space used for business. However, be careful with this one! Here too, there is a temptation to get overly creative. The IRS requires that the space must be used ‘exclusively and regularly’ for business use. So occasionally doing paperwork at the dining room table doesn’t mean you can claim the dining room for business. Nonetheless, don’t let this scare you from taking this deduction if you truly qualify!
These are just some of the most common business expenses. The important thing to remember is that if something costs you money in the course of doing business, it is likely deductible. And not taking that deduction is ultimately leaving money on the table- something you can’t afford to do!