With tax season approaching, many individuals are beginning to organize their documents and financial statements to file their annual returns. One of the more confusing aspects of a personal tax return is determining what can be written off. This article will examine the definition of a write-off and explore which expenses are legitimate and which are not. 

It is important to note that the following information is not intended as financial or tax advice. Please speak with your financial advisor when filing your tax return and identifying eligible deductions. 

Definition: According to the Turbotax website, a tax write-off is a legitimate expense that can be claimed as a deduction or a credit and lower your taxable income. A tax write-off is also known as a tax deduction.

The Internal Revenue Service (IRS) is in charge of collecting taxes and administering the process. When a return is filed, the IRS calculates reported income minus tax write-offs, deductions, and credits to determine the applicable tax bracket. There are two basic categories of tax write-offs – 

1. business expenses

2. deductions, credits, or expenses that can be claimed on individual tax returns. 

The most tangible benefit from a tax write-off is reducing taxable income, which lowers required taxes to be paid. 

Standard business deductions are operating expenses that the organization relies on to operate on a day-to-day basis. Normal deductions include rent, office supplies, and payroll expenses. Other standard business deductions are employer-sponsored health benefits, tuition reimbursement plans, awards and bonuses, and salaries.

Who is Eligible to Write-off Expenses?

Individuals can file write-offs in the form of deductions and credits. A common deduction on the federal income tax return is the standard deduction, which the IRS allows taxpayers based on income and filing status. Deductions reduce taxable income. By contrast, tax credits are a dollar-for-dollar reduction of the taxes you owe – they don’t reduce taxable income. Common credits include the Child Tax Credit, the Earned Income Tax Credit, and the Child and Dependent Care Credit.

Self-Employed individuals are eligible for many of the same business tax deductions as corporations. These deductions lower taxable self-employment income. Typically, these deductions include the total expense of business equipment (up to $1,050,000) in the first year you put the equipment in service, as well as expenses for supplies, mileage, and office space. 

Small Businesses could be classified based on revenue, sales, or assets – but the number of employees is the most common characteristic of small businesses. A privately owned partnership, corporation, or sole proprietorship with employees will be eligible to deduct payroll expenses and other expenses directly related to operating the business.

Corporations are permitted to deduct business expenses that are “ordinary and necessary business expenses.” These include current expenses and capital expenses. Current expenses are required to keep the corporation operational and are fully tax-deductible. Capital expenses include investments or real estate purchased to generate income from the business and are eligible for deductions. 

Remember: The IRS tax code makes the ultimate determination which deductions a business does and does not qualify for. Please consult with your financial advisor.

Common Tax Write-offs

Not every individual or corporation will qualify for every deduction. With that said, here are the most common standard tax write-offs: 

  • Standard deduction: In 2021, the standard deduction is $12,550 single and $25,100 married filing jointly.
  • Mortgage interest: Individuals can write off the interest paid on the first $750,000 of home loans on homes purchased after December 15, 2017. Different rules apply for homes purchased before this date. 
  • Student loan interest: Interest payments made on a qualified student loan can be written off up to $2,500 for individuals whose income status qualifies. 
  • Charitable donations: Contributions made to qualified 501(c)3 organizations may qualify for a write-off. 
  • Medical and dental expenses
  • Health savings account (HSA) contributions: Contributions to an HSA can be written off if the individual is otherwise eligible. 
  • Traditional IRA contributions: Eligible contributions to a traditional IRA may be deducted from a return. Individuals are permitted to contribute up until the tax deadline and reduce taxable income for the tax year.

Non-Deductible Expenses: Annual expenses that don’t qualify as a tax write-off include child support, alimony after 2018, political contributions, and Roth IRA contributions.

In Conclusion

There are many aspects to our financial lives, and finances can become quite complicated. If you have gotten to a place where you cannot pay your bills and you are behind on your tax obligations, bankruptcy may be a smart option for you or your business. While tax obligations cannot be erased through bankruptcy proceedings, you may be able to free up the income you need to meet those obligations. 

For more information on how to explore if bankruptcy is the right solution for your financial struggles, call the Sarasota offices of Keith Ellis, bankruptcy attorney.