The term "Write-Off" when it comes to taxes can mean a couple of different things and I think sometimes there is confusion about what can and can't be "written off" and how those "write off's" affect your bottom line when it comes to paying taxes.
The first type of write off's are what are also referred to as "itemized deductions". When you file your individual tax return, you are allowed to either take a standard deduction based on your filing status (pre-determined by the IRS, amounts for 2024 can be found here), or you can choose to "itemize your deductions" if that would result in a lower tax liability.
When you "itemize your deductions" you can deduct things like your mortgage interest, property taxes, other state and local taxes (but only a maximum on $10k in taxes total), charitable contributions, casualty and theft losses (subject to limitations), gambling losses, and medical expenses (but only the portion that exceeds 7.5% of your adjusted gross income.) Phew, that was a mouthful! No wonder people think taxes are complicated! They are! But don't worry, I am here to help. I've been told I have a knack for taking complicated tax topics and breaking them down in a way that is easy to understand.
So if your itemized deductions, the total of all the items just listed above, are more than your standard deduction for your filing status, you can elect to "itemize your deductions" on your tax return and now you are "writing off" things like your mortgage (interest) and charitable giving. Basically those amounts are being subtracted from your income before tax is assessed. Any individual or couple can elect to itemize their deductions or choose the standard deduction (except in cases where a married couple files separately, in that instance, both spouses would need to either itemize or both spouses would need to take the standard.)
Some tax software can analyze which way would be most beneficial. What I see quite often here in Oregon where I live is that it may be more beneficial to take the standard deduction on the federal return (the standard deduction amounts doubled in 2018 with the implementation of the Tax Cuts and Jobs Act) but since Oregon's standard deductions are much lower, it often can be beneficial to itemize your deductions for Oregon only, while still claiming the standard deduction on the federal return.
The second way that taxpayers can have "write-off's" is if they own their own business or are employed as an independent contractor. Basically anytime you are paid for something and it's not reported to you on a W2, the IRS wants you to report and pay tax on that income. And you aren't just just responsible for paying regular income tax. This type of income is also subject to the "Self-Employment Tax", which is the Social Security and Medicare taxes that are usually taken care of through payroll when you have a regular W2 job. This all sounds kind of shitty, right? Not the best news if this is the situation you are in.
But... this is where "write-off's" can be a huge help. You see, you are only taxed on the "net income" that you make, which means the total after you subtract out all your expenses or "write off's". This type of write off can be anything that is "ordinary and necessary" for your business. Basically, anything you need to buy to help you earn the money that you earned, any licenses and permits you have to get, continuing education, advertising and marketing, ect.
If you have questions about specific write offs, or want to understand your tax filing requirements better, you can check out my new ebook series Taxes When You Are Self Employed, with a specialty course for Amazon and Uber Drivers, and courses coming soon for Hair Stylists and Lash Artists, Photographers and Videographers, Tattoo Artists, and Social Media Managers. More specialty courses are in process, if you have a specific industry or profession you would like to request, please leave a comment or email shay@caslerfiancial.com
If you don't have time for an ebook or just want to skip the hassle and ask your questions directly, I am available for 1:1 zoom consults. Schedule online here:
I do want to add a little bit more clarity here, as I've had clients come to me asking how they can get more write off's in hopes of offsetting their W2 wage income. You use to be able to deduct certain "employee related business expenses" - things like auto expenses or client gifts could also be included in your "itemized deductions" (subject to a 2% limit similar to the medical expense limitation) if you were a W2 employee. Those deductions also went away in in 2018 with the implementation of the Tax Cuts and Jobs Act.
Now, let's say you are paid on a W2, AND you also have a side gig, or maybe your spouse has their own business or does work as an independent contractor. If the side gig or separate business venture has a loss for the year, meaning the expenses are greater than the amount of income collected, that loss can offset your other income and help save you money on taxes. But be careful in this situation. The IRS wants you to show a profit 3 out of the last 5 years or they may deem your activity a hobby rather than a trade or business. Here is a helpful fact sheet published by the IRS if you are interested in reading more.
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