Wondering how, why and what to write off on your taxes? This article will answer all your burning questions.

Most people have heard of tax write-offs, especially in the context of businesses or millionaires using them. But do you know how write-offs work on your own taxes?

Even if you’re a non-business owner with a regular income, you may be surprised to learn that there are still many things you can do to reduce your tax bill. Most people do not take full advantage of these opportunities because they aren’t aware they exist, or they don’t properly understand how they work. 

With the right knowledge, you may be able to reduce your yearly tax bill by a significant amount. Keep reading to learn more about tax write-offs and how they work.

What Exactly Is a Tax Write-off?

In simple terms, a tax write-off, or “tax deduction”, as it is officially known, is a reduction in your tax bill. Write-offs usually come in the form of valid expenses you accumulate throughout the year that are eligible to be written off according to tax regulations.

For example, if you are a business owner, you may be eligible to deduct operating expenses from your taxes. If you had a total of $2,000 of these expenses in the last year, you can report this on your taxes. You will then receive a reduction of $2,000 on your tax bill, or a tax credit of $2,000.

The real-life versions of this situation are often more complicated, and the actual money you get (whether through a deduction or a credit) may be different from the original write-off amount. But, the general principle remains that you can write off certain expenses and pay a reduced amount of taxes as a result.

Why Should I Utilize Tax Write-offs?

The most important reason for utilizing tax write-offs is fairly obvious: it leads to keeping more of your hard-earned income. It also allows you to accurately report valid expenses that deserve to be tax-deductible, such as healthcare and costs associated with your work. 

But, the ways it accomplishes this are just as important as the final result.

Tax write-offs often work to lower your tax bracket. Because of the United State’s graduated tax system, this can affect the impact of your write-off, as your savings is correlated to the percentage of tax you pay, which is determined by your bracket. This means that your potential savings is increased the higher your tax bracket is. 

For example, if you have a $1,000 tax deduction, it will be worth $100 if you’re in the 10% bracket. But, if you’re in the 32% bracket, it would be worth $320. 

What Can I Write-off?

While you may initially believe that tax write-offs are only for corporations or business owners, there are a lot of things the average person can write-off on their taxes. Here are a few of the most common examples. 

State and Local Taxes

Most Americans aren’t thrilled to see that they have to pay federal taxes on top of state and local taxes. But, there’s good news: you can actually write off state and local taxes on your federal taxes. It’s called the SALT deduction, and you can deduct up to $10,000 with it. 

Property Taxes

Own a home, land or other type of property? You can deduct up to $10,000 (or $5,000 for married couples filing separately) of your local property taxes on your federal taxes. This deduction is often overlooked because property owners don’t get a formal notice or tax return for it, but it is very much a valid tax deduction.

Mortgage Interest

Mortgage interest is typically deductible on your federal taxes. You can write off the interest you pay on home loans up to $750,000 for homes purchased after December 15, 2017. For homes purchased before that, you can deduct interest on loans up to $1,000,000. Keep in mind that this doesn’t include payments that go toward your principal, just your interest.

Student Loan Interest

With 42.9 million Americans dealing with student loan debt, many could use any help they can get to pay them off faster. Fortunately, people with student loan debt are eligible for a tax break. For individuals making under $70,000 in modified adjusted gross income (MAGI), or under $140,000 for those who are married and are filing jointly, you can get some big savings from deducting student loan interest. You can write off up to $2,500 per year.

Traditional IRA Contributions

Traditional IRAs are tax-deductible upon contributing and are only taxed upon distribution, while Roth IRAs work in reverse. This means that you can deduct all of your traditional IRA contributions from the past year, which is typically capped at $6,000.

Charitable Contributions

One of the most well-known and popular tax deductions, charitable contributions can offer some pretty big tax breaks. Despite this, many people still don’t report charitable contributions because they are under the impression that they don’t donate enough to qualify.

The limits and deduction amounts of charitable contributions vary by several factors. These include your adjusted gross income (AGI), the method of your donation (cash vs. non-cash), and the type of charity you’re donating to. Generally, charitable contributions are deductible between 20% and 60% of your AGI.

In addition to the donation itself, you can also deduct certain out-of-pocket expenses that are accrued while facilitating the donation. This can include transportation costs such as gas, or the cost of goods used to put on the event.

Medical Expenses, Including Dental

If you’ve had unexpected or larger than normal medical expenses within the past year, there might be a silver lining. If your total unreimbursed medical and dental expenses exceed 7.5% of your adjusted gross income, you may be eligible for a tax write-off.

This could be useful in years where you need high-cost medical care such as surgeries, in-hospital care or expensive medications.

Health Savings Account (HSA) Contributions

Health Savings Accounts are accounts that are meant to help you pay medical expenses, especially unexpected ones. They are usually offered by employers, and in some cases, are dealt with via a payroll deduction. In this scenario, there’s nothing you need to do, as the HSA contribution was never counted as income in the first place.

But if you are in charge of your own HSA, all of your contributions are eligible for a tax deduction, provided you stay within the pre-defined contribution limits.

How To Prepare Yourself To Do Write-offs

In order to take advantage of tax write-offs, you must do accurate bookkeeping throughout the year to document where and how you’re spending money. Since so many tax write-offs are reliant on your total income versus the amount you spend on a certain expense, it is necessary to document every time you spend money that could potentially go toward a write-off.

Keep track of all your expenses throughout the year using a spreadsheet or other organization method. Try to have an idea of what write-offs you’ll take advantage of before it’s time to do your taxes. This way, you can easily create categories in your spending as the year progresses, rather than figuring out where every expense fits in at the end of the year.

Need Help With Tax Write-offs?

If all of this sounds confusing, that’s because it is. Taxes can be tricky to navigate, and the average person just doesn’t have the time or interest to dedicate hours into learning about how it all works.

That’s why many people opt for a professional tax and bookkeeping service like Sims Resource Group. No matter how complex your tax situation is, we can do all the hard work for you so you end up with accurate tax information that leaves no stone unturned — including potential write-offs you may have been missing.