What Does ‘Write It Off’ Mean for Taxes?
Demystify tax write-offs. Learn how legitimate expenses reduce your taxable income and tax liability, covering key principles for smart tax planning.
The phrase “write it off” refers to reducing taxable income by accounting for certain expenses or costs incurred by individuals or businesses. This concept allows taxpayers to lower their tax bill by acknowledging eligible expenditures. Understanding how to write off expenses is important for anyone seeking to understand their tax obligations.
How Write-Offs Reduce Taxes
A “write-off” reduces a taxpayer’s gross income, leading to a lower amount of income subject to taxation. When an expense qualifies, it is subtracted from total income, decreasing the figure on which tax is calculated. For instance, if an individual earns $60,000 and has $7,000 in qualifying write-offs, their taxable income reduces to $53,000. This results in a lower overall tax liability. The less income considered taxable, the less tax is owed, allowing a portion of income to be sheltered based on eligible expenses.
Deductions Versus Credits
Both deductions and credits reduce tax liability through distinct mechanisms. Tax deductions reduce your taxable income, lowering the amount of income on which tax is calculated. For example, a $1,000 deduction for someone in the 20% tax bracket saves $200 in taxes. The benefit of a deduction depends on your marginal tax rate; higher-income individuals in higher tax brackets receive a greater benefit.
Conversely, tax credits directly reduce your actual tax bill dollar-for-dollar. A $1,000 tax credit reduces the tax owed by $1,000, regardless of your tax bracket. Credits are more valuable than deductions for the same dollar amount because they provide an immediate reduction.
Some credits are non-refundable, reducing liability to zero but not resulting in a refund if the credit exceeds your tax bill. Other credits are refundable, generating a refund even if they reduce your tax liability below zero.
Common Write-Off Examples
Common expenses can serve as write-offs for both individuals and businesses. For individuals, significant itemized deductions include mortgage interest. State and local taxes (SALT), including income, sales, real estate, and personal property taxes, are also deductible, though they are subject to a federal limitation. Charitable contributions to qualified organizations can be deducted, generally up to 60% of your adjusted gross income if itemizing. Medical and dental expenses exceeding 7.5% of your adjusted gross income are also eligible for deduction.
Many individuals opt for the standard deduction, a fixed amount based on filing status, rather than itemizing if their total eligible expenses are less than the standard deduction amount. Small businesses and self-employed individuals have a broader range of deductible expenses. Common business write-offs include office supplies and equipment. The home office deduction allows a portion of home expenses, such as utilities, insurance, and property taxes, if a part of the home is used exclusively and regularly for business. Business travel expenses, including transportation, lodging, and 50% of business meals, are also deductible.
Other typical business deductions include:
Advertising and marketing costs
Professional development
Business insurance premiums
Legal and accounting fees
Key Principles for Claiming Write-Offs
To claim write-offs, adherence to specific principles is necessary. For business expenses, the Internal Revenue Service (IRS) requires them to be both “ordinary” and “necessary.” An ordinary expense is common and accepted in your trade or business. A necessary expense is helpful and appropriate for your business, though not indispensable.
Accurate and organized record-keeping is important for substantiating any claimed write-offs. Taxpayers must maintain detailed records, such as receipts, invoices, mileage logs, and bank statements, to support their deductions in case of an audit. Without proper documentation, the IRS may disallow claimed expenses, leading to increased tax liability, penalties, and interest. Avoid “double-dipping,” which means claiming the same expense multiple times or claiming expenses already reimbursed or paid with tax-exempt funds.