Tax write-offs are often misunderstood or misinterpreted. Write-offs are reductions in the amount of your income upon which the IRS calculates your taxes due. In some cases, tax write-offs make logical sense, such as real estate taxes, but in other situations, such as accelerated depreciation of assets, they may appear illogical and contrived. Tax write-offs are more commonly called tax deductions, indirectly permitting taxpayers to lower their tax liability.
Individuals' Tax Write-Offs
Individuals can use specified write-offs to reduce their taxable income. Significant individual tax write-offs include mortgage interest, real estate taxes, state income taxes and charitable deductions. The IRS, using laws passed by Congress, defines the write-offs you may use in each tax year. For example, at one time, interest you paid on credit cards and auto loans was tax-deductible. However, Congress changed the rules and removed these write-offs.
If you own a business, whether large or very small, you can write off most expenses necessary for you to operate the business. Costs such as supplies, utilities, commissions, advertising, legal or accounting fees, and depreciation of assets are common tax write-offs, lowering your business's taxable income. Record all business expenses to generate written evidence of write-offs to lower your business' tax bill.
Write-Offs Different From Tax Credits
The IRS typically offers some tax credits along with write-offs. While write-offs lower your taxable income, tax credits directly reduce your tax liability. In some cases, using tax credits can generate a refund higher than the tax you had withheld. Write-offs alone cannot directly generate money from the IRS. While they lower your taxable income, they do not subtract money directly from your taxes, nor can they generate money back. For example the earned income credit can create a tax refund higher that your income withheld for taxes.
Tax Write-Offs Change
The logistics and fairness of tax write-offs are sometimes a mystery. Tax write-offs can change yearly. In many cases, those write-offs permitted by the IRS in one year are prohibited in the next. Take all opportunities the government offers you to lower your taxable income. However, never assume that write-offs from prior years are still allowed in the current tax year. Changes to write-offs are common. Stay informed to lower your tax bill.
- tax forms image by Chad McDermott from Fotolia.com