What is a tax write-off?
January 5, 2023 7 min read
Tax write-offs, also known as tax deductions, can reduce a person’s taxable income. And that could mean a lower tax bill.
But how do you know what kinds of things qualify as tax write-offs? Are there different write-offs for individuals and businesses? Here’s an overview of how tax write-offs work and what kinds of write-offs taxpayers should know about.
- Tax write-offs, or tax deductions, can reduce taxable income.
- Tax credits and tax write-offs may both reduce the amount people need to pay in taxes, but they work in different ways.
- People may be able to choose between standard deductions and itemized deductions when filing their taxes.
- Different tax write-offs might be applicable to individuals, business owners and self-employed people.
What’s the difference between a tax write-off and a tax deduction?
Tax write-offs and tax deductions refer to the same thing. The two terms are used interchangeably.
But some people may confuse these with tax credits, which are different from write-offs and deductions. Tax credits can also reduce the amount you owe in taxes. But they don’t lower your taxable income like tax write-offs do. Instead, tax credits are subtracted from your tax bill itself.
So if your tax bill is $3,000, but you have $1,000 in tax credits, you might only have to pay $2,000 in taxes, for example. There are many different types of tax credits, like the earned income tax credit, the tax credit for owning an electric vehicle and the credit for adopting a child.
How do tax write-offs work?
When it comes time to file your taxes, you’ll need to know your gross income. The IRS broadly defines gross income as including “wages, dividends, capital gains, business income, retirement distributions as well as other income.”
Then, you’ll find your adjusted gross income (AGI). AGI is your gross income minus certain adjustments.
AGI can impact how much income tax you have to pay or how much your tax refund might be. Plus, AGI may also help determine what tax deductions and credits a person qualifies for.
Standard deductions vs. itemized deductions
When an individual files their taxes, they generally have two options: Take the standard deduction or opt for itemized deductions.
The IRS recommends itemizing deductions if the itemized total will be more than the standard deduction, or if itemizing is your only option.
If you choose the standard deduction, you’ll subtract a predetermined dollar amount from your AGI. The IRS updates the standard deduction amounts every year. And what standard deduction amount applies to you depends on things like your age, filing status and more.
For the 2022 tax year, the standard deduction amount is $12,950 for single filers and $25,900 for married filing jointly.
So how do you know whether the standard deduction or itemized deductions make sense for you?
The standard deduction is typically the easier of the two options since it doesn’t involve things like saving receipts and keeping track of deductible costs throughout the year.
But if your itemized deductions will be more than the standard deduction that applies to you, it may be worth the extra effort, according to the IRS. Plus, some people aren’t allowed to use the standard deduction. So make sure to check with the IRS to see whether you qualify.
If you choose to itemize your deductions, here are a few things that might qualify:
Common personal tax write-offs
There are a few common personal tax write-offs it might help to know about. But remember, each person’s tax situation is different. And not all write-offs are available to everyone. So before you file your taxes, make sure to do your research and know what deductions apply to you.
Certain medical expenses might qualify as tax write-offs, including:
- Co-insurance, co-pays and insurance costs paid with already-taxed money.
- Travel expenses for qualifying medical care.
- Non-cosmetic eye surgery.
- Medical expenses that aren’t covered by insurance, like extra hearing aids and glasses.
Some home improvement costs might also qualify as deductible medical expenses, too. Things like installing ramps, lowering countertops and other aging-in-place costs might be eligible. But if the changes increase your property value, that affects how much of the cost qualifies as a tax write-off.
To find out more, you can use the IRS’s interactive tool to find out whether your medical expenses are deductible.
Personal property taxes
Some people may be able to write off the personal property taxes that were charged and paid during the relevant tax year. That might include taxes on things like a car or boat.
But there are limits. Individuals can deduct up to $10,000 of combined state and local income, sales, and property taxes. And married couples who file separately can deduct up to $5,000 each.
If you itemize your tax deductions, some donations to qualified charitable organizations may qualify as tax write-offs. But there might be limits to the amount you can write off. And not all charitable donations qualify. So make sure you know which ones are eligible before filing your taxes.
Other common tax write-offs
- IRA contributions: You may be able to deduct contributions to a traditional IRA. But there are limits to how much you can contribute to an IRA per year that might depend on things like your age. And if you or your spouse has a retirement plan through an employer, that might limit how much of the IRA contribution is deductible. Plus, income can affect deduction limits too.
- Health savings account (HSA) contributions: You may be able to write off contributions you—or other people that aren’t your employer—made to your HSA. You may be able to deduct HSA contributions even if you don’t itemize.
- Student loan interest: Interest paid on qualified student loans during the relevant tax year may be tax deductible. There are limits to how much student loan interest you can write off. And you have to make sure you meet other requirements.
- Mortgage interest: If you made mortgage payments this tax year, you might be able to write off some or all of the amount you paid in interest.
- Job expenses: People with certain jobs—like educators and qualified performing artists—can claim some unreimbursed job-related expenses as tax deductions. Eligible educators, for example, can deduct up to $300 for classroom materials on their tax returns for the 2022 tax year.
Common business tax write-offs
Business owners may be able to write off certain business-related expenses. Keep in mind that owning your own business is different from being self-employed. And it’s important to know which category you fall under, so you can file your taxes and calculate your deductions correctly.
Here are a few common business tax write-offs to know about:
- Interest on business loans: You may be able to write off the interest paid on a qualified business loan.
- Routine maintenance: The costs of keeping your business property in operating condition may be tax deductible. That might include things like repairing or maintaining business equipment, painting business buildings and fixing things like broken windows.
- Insurance costs: Generally, small-business owners can write off various insurance expenses. That might include premiums for liability insurance, malpractice insurance, employee medical insurance and more.
There are many more possible business tax write-offs out there. So it might help to check with the IRS for more information and talk to a tax professional for help finding all qualified deductions.
Self-employed tax write-offs
If you’re self-employed, how you file taxes is different from a business owner who employs other people. Some self-employed tax deductions might include:
- Home office expenses.
- Health insurance for you, your spouse and your dependents.
- Qualified contributions to retirement plans.
- Business-related travel costs such as flights, gas and mileage.
Tax write-offs in a nutshell
Tax write-offs can reduce your taxable income. It’s important to know what kinds of tax write-offs you do and don’t qualify for.
It might be a good idea to consult with a qualified tax professional to help you figure it all out. After all, tax laws and regulations can change from year to year. So you might be eligible for new write-offs and credits that didn’t apply to you last year—or vice versa.
And as tax season approaches, make sure you know how to identify and avoid tax scams to keep yourself protected.