So what is a tax write-off? I’ll let Johnny Rose do some of the heavy lifting on this one.
As Johnny said, tax write-offs (aka tax deductions) are expenses that are used to reduce your taxable income. He mentioned business expenses specifically, but there are also many personal tax write-offs as well. Some of the most popular personal deductions include:
Above The Line Deductions
- Retirement Account contributions (IRA/401k/403b)
- Health Savings Account contributions (HSA)
- Student Loan interest
Below The Line Deductions
- Mortgage interest
- State and local taxes
- Charitable donations
- Medical expenses that exceed 7.5% of your income
- Student Loan interest
- Education expenses
Above the line deductions are deductions that can be taken in addition to the standard deduction. Below the line deductions cannot be taken in addition to the standard deduction – you must choose between below the line deductions or the standard deduction.
Standard Deduction
The IRS offers something called the standard deduction. The standard deduction is a predetermined amount that tax payers are allowed to use on their taxes instead of itemizing (making a list of) their deductions. Even if your deductions are less than the standard deduction, you can apply the standard deduction to your taxes and shave that amount off of your taxable income. It changes from year to year because it is tied to inflation, so it is important to use the the correct year’s standard deduction. For instance, from 2021 to 2022, the standard deduction rose from $12,550 to $12,950 (for those filing single) and $25,100 to $25,900 (for those filing jointly).
So what does it mean to reduce your taxable income?
As we remember from the post about income tax brackets, in the US, you pay more in taxes as your income increases. Tax deductions allow you to decrease the amount of income that you owe taxes on so that you end up with a lower tax bill. For example, if your income in 2022 is $60,000 and you have use the standard deduction, your taxable income falls by $12,950 to $47,050. This means that when you are looking at the income tax bracket, you would use $47,050 instead of $60,000!
So should I use the standard deduction or itemize?
The rule of thumb that is typically used to determine the answer to this question is to look figure out a ballpark total of your deductions. If that total is greater than the standard deduction, itemizing will likely be your best bet, depending on what expenses you have records of and how long it will take you to itemize everything.
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