Tax write-offs and the benefits of using them
When filing your taxes, there are ways to minimize your taxable income — commonly known as a tax write off. While, many people have heard of tax write-offs they may not be sure how to take them. Tune in as we explore the answers to “what’s a write-off?” and “what to write-off on taxes?”
What’s a tax write-off?
First, let’s answer, “what’s a write-off?” Simply put, a tax write-off is a reduction on your overall tax bill. In tax lingo, it’s called a tax deduction.
Tax credits could fit the definition of a write-off, but for the purposes of this post, we’ll exclusively cover tax deductions. As an aside – if you want to go deeper on the difference, check out our credits vs. deductions post.
Exploring the tax write-off meaning a little further…
It’s beneficial to understand the tax write-off meaning because it can lower your tax bracket.
The U.S. taxes its citizens using a graduated tax rate. This means there are tax brackets — and your income between the levels are taxed at different rates.
When you take write-offs, you can reduce your taxable income based on your tax bracket. So, the higher your tax bracket, the more you could potentially save. For example, a $100 tax deduction is worth $10 to a taxpayer in the 10% bracket, while a $100 deduction is worth $37 to someone in the 37% bracket.
What can I write-off on my taxes?
If you’re trying to figure out what to write-off on taxes, below a general list of common tax deductions. Additionally, we’ve called out a few overlooked tax deductions in this post.
Keep in mind, all but one of these deductions requires the itemized deduction versus a standard deduction. What does that matter? Well, it’s generally only beneficial to itemize your deductions if the total of your itemized deductions is more than standard deduction.
1 – Property taxes:
You can deduct property taxes paid to a county or other local government during the year. This tax deduction is commonly missed because there isn’t an informational tax return or notice associated with it. It’s up to you to remember to deduct the amount paid. Learn more about deducting property taxes.
2 – State and local taxes:
Believe it or not, state and local taxes are a federal tax write-off – and it’s more commonly referred to as the SALT deduction. The current limit for this specific deduction is $10,000.
Gain more insight into state tax.
3 – Deductible Individual Retirement Account contributions (IRA):
If you contribute to a Traditional IRA, you could be eligible to write-off a portion or all of your retirement contributions as a tax deduction. With contribution limits up to $6,000 (or $7,000 if the account owner is age 50 or older), overlooking this tax deduction results in a missed opportunity to reduce your taxable income. Any contribution is reported as a deduction on line 19 Form 1040 Schedule 1.
4 – Charitable contributions:
Did you know you can simultaneously do good and get a tax write-off? It’s true! While charitable donations are a common tax write-off, they are still overlooked because many people don’t think they donate enough per year to qualify.
Limits are generally based on your adjusted gross income (AGI), type of charity donating to, and method of donation. Cash and non-cash donations are deductible between 20% and 60% of your AGI.
You can even write off out-of-pocket expenses incurred while donating your time to charity. (Think gas mileage to and from your charitable event or cost of goods purchased exclusively for the event.)
5 – Tax-deductible contributions to a Health Savings Account:
Medical expenses can add up. To combat this, many employers offer Health Savings Accounts (HSA). Contributions made directly to the HSA, (not through payroll deductions) are a tax-deductible expense. HSA Contributions made through a payroll deduction are not tax deductible since the contribution has never been recognized as income. Learn more about the tax-deductible HSA contribution limits and more on this topic.
Need help with your tax write-offs in 2021?
Now that you know more about the topic, it’s up to you to maximize your tax write-offs in 2021.
With H&R Block’s many tax filing options and products, gain the confidence of knowing you’ll get the most money back. We speak the tricky language of taxes and can help you get your maximum refund through write-offs and tax credits.
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