11 Common Tax Write-Offs
Tax laws exist to accomplish two things: create revenue for the government, and motivate behavior. Everyone understands the revenue generation part, especially when they are writing a check to pay their taxes. But we often don’t think about how tax laws motivate behaviors. Tax write-offs are a big part of that.
What is a tax write-off? In a nutshell, it’s a legitimate expense that you can deduct from the amount of income that you’ll be taxed on. Reduce your taxable income with a tax-write off, and you will reduce your taxes. Tax write-offs are often offered for expenditures the government wants to encourage you to make, like for charitable donations. That’s how the government uses the tax law to motivate behavior.
In other words, a tax-write off is an incentive. As long as you’re not misapplying the law (say, by trying to write off a vacation as a business trip), you should take maximum advantage of these common tax write-offs. The government wouldn’t have created them if it didn’t want you to use them.
If you’re wondering “How do tax write-offs work?” and “What can I write off on my taxes,” read on.
The government wants to promote home ownership, and one way to do so is to give homeowners a tax write-off for the mortgage interest they pay for mortgage debt incurred after December 15, 2017. The write-off is limited to the interest on up to $750,000 of your mortgage if you’re single or married filing jointly; married taxpayers filing separately can write off $375,000 each. If your mortgage exceeds $750,000, you can’t write off interest on amounts above that threshold.
Mortgage Insurance Premiums
In addition to being able to deduct the interest you paid on your mortgage, you can also deduct the expense of mortgage insurance premiums.
You can deduct state and local taxes (SALT) that you have paid, including property taxes, from your taxable income when filing your federal income tax. However, under the Tax Cuts and Jobs Act of 2017, your total SALT deduction is limited to $10,000.
State Income Tax
You can deduct any state income taxes you paid on your federal income tax return. However, like property tax, state income tax falls under the SALT umbrella, so your deduction for all state and local taxes, including state income tax, is capped at $10,000.
It makes sense that the government would want to encourage charitable donations; the more people can get their needs met through charities, the less likely they may be to depend on government benefits. As a general rule, you can deduct cash donations to a charity up to 60% of your adjusted gross income (AGI). That can really put a dent in your tax bill, as well as helping a worthy cause. You can also get a write-off for donation of other types of property, but keep good records as to what items you donated and their value.
Lifetime Learning Education Credit
Want to take classes for credit at a community college or four-year college or university? The Lifetime Learning Credit lets you reduce your taxes owed by the amount of your qualified tuition and related expenses up to $2,000 per tax return. The amount of the credit begins to phase out above a certain income threshold, and you can’t “double-dip” by claiming the same expenses for multiple education credits. But the Lifetime Learning Education Credit is worth claiming if you can; unlike a tax deduction, which just reduces your taxable income, a tax credit like this reduces your taxes dollar-for-dollar.
American Opportunity Education Credit
Like the Lifetime Learning Credit, the American Opportunity Credit is a tax credit for educational expenses—in this case, for tuition, fees, books, and supplies for the first four years of higher education. The maximum annual amount of this credit is limited to $2,500 for each eligible student (not per tax return, as with the Lifetime Learning Credit). That’s 100% of the first $2,000 of qualified educational expenses per eligible student, and 25% of the next $2,000.
This credit is partially refundable, meaning that if the amount of the credit exceeds the amount of your tax, 40% of the remaining credit amount (up to a maximum of $1,000) can come back to you as a tax refund.
Interest on Student Loans
You can deduct interest paid on your student loans during the tax year, up to a maximum of $2,500. However, this deduction is eliminated at $80,000 of adjusted gross income (AGI) for single taxpayers and $165,000 of AGI for married taxpayers filing jointly.
Self-Employed Health Insurance Premiums
If you’re self-employed, you may have to pay your own health insurance premiums if you’re not on a spouse’s or parent’s plan. You can deduct 100% of those premiums that you pay for yourself, your spouse, and your dependents each month. That’s true even if you don’t itemize your tax deductions. However, this write-off is only available to you if you are not eligible to participate in an employer-subsidized health insurance plan through a spouse or other family member.
Contributions to Retirement Plans
Unsurprisingly, the government wants people to save for retirement, so there are tax incentives for contributions to your 401(k), traditional IRA, and other retirement plans. You could be eligible for the “saver’s credit” if you are a low- or mid-income earner. The amount of the credit is 10%, 20%, or 50% depending on your AGI and tax filing status; the maximum is $1,000 for a single filer and $2,000 for a married couple filing jointly. You get the credit only for new contributions, not for rollovers into an IRA.
In addition, you can deduct contributions to a traditional IRA (but not a Roth IRA) from your taxable income. The maximum contribution you can make to your IRA in a year is $6,000, plus another $1,000 if you are 50 or older.
You can take a tax write-off for medical expenses, but only for the amount that is above 7.5% of your AGI. For instance, if your AGI is $100,000 and you had $10,000 in medical expenses paid during the tax year, you could deduct $2,500 ($7,500 is 7.5% of your AGI).
The Bottom Line
These are only some of the many possible tax write-offs you can use to reduce your taxes. For instance, you may be able to write off home office expenses or other costs. To learn about the tax write-offs you qualify for, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.