Tax write-offs as an individual

By Katie Martens

We can’t begin any article about tax write-offs without first paying homage to the wonderfully funny and insightful Schitt’s Creek scene about tax write-offs. Really, you could start and end your education on tax write-offs with that one minute and fifty-five second scene. If you want to further educate yourself, read on, and we’ll:

  1. Define what a tax write-off is;

  2. What typically counts as a write-off (according to the IRS); and

  3. Common strategies that people think are clever, but really aren’t so clever, when it comes to tax write-offs.

Tax Write-Off Definition

Whenever you’re discussing a topic involving taxes, it’s usually a good practice to consult the IRS’ website when looking for answers. However, if you search the IRS’ website, you probably won’t find anything specific on “tax write-offs.” That’s because “tax write-off” is an accounting term, not an IRS term, that generally means a legitimate expense that can be claimed as a deduction or credit on your tax return. Let’s break it down even further so we have a clear idea of what “tax write-offs” are:

  • Tax deduction = sometimes used interchangeably with “tax write-off,” tax deductions lower your taxable income, which lowers your tax liability. Taking a very simple example, I make $50,000 and I buy a new printer for my work. Let’s say the cost of the printer is $700. When I’m doing my taxes (or let’s be honest here, when my accountant is doing my taxes), I will deduct the $700 cost from my total income. This way, instead of being taxed on my $50,000 income, I’ll be taxed at $49,300. The deduction for the printer reduced the amount of income for which I’d be taxed.

  • Tax credit = tax credits do the same thing as tax deductions in that they reduce your tax liability, but how you arrive at a reduced tax liability is different. Tax credits are incentives created by the government, both at the state and federal level, and if you meet the criteria for a particular incentive, you can take the tax credit. A credit reduces the tax you owe, dollar for dollar. Let’s take the printer example from above: My taxable income was reduced to $49,300 because of the printer deduction. If the accountant runs the numbers and arrives at a $2,500 tax bill on my $49,300 taxable income, the accountant can then apply any credits toward my $2,500 tax bill to reduce it. In this example, let’s say I have children, and the federal government wants to help offset the cost of raising kids, so the federal government offers a tax credit worth up to $3,600 in child care costs per child. My accountant can apply the child tax credit to my $2,500 tax bill, which reduces my tax liability to $0.

You can find more detailed information on each of these credits, and others, on the IRS’ website. The credits will also change depending on the administration in charge of the federal government, since tax credits are meant to reflect the behaviors that the administration wants to encourage, like clean energy or saving for retirement.

What Counts as a Write-Off

By now, you should have a good working knowledge on what tax write-offs are - deductions or credits that people and businesses use to reduce their tax liability. Now we’ll give a brief overview of what can be considered a deduction or credit.

Deductions can be taken by individuals and businesses. Even if you’re a sole proprietor, you can take your business deductions on your personal tax return, you list them on Schedule C. Here’s a list of deductions that individuals can take:

  • Work-related → business expenses, business use of car, business use of home

  • Itemized deductions → personal property tax, real estate tax, charitable contributions, home mortgage interest

  • Education deductions → student loan interest, work-related educational expenses

  • Health Care deductions → medical and dental expenses, health savings account (HSA)

  • Investment related deductions → sale of home, IRAs, capital losses, bad debt

There are fewer tax deductions available to businesses, even though business expenses are still the primary source of deductions for businesses.

Common tax credits available for individuals:

  • Child tax credit

  • Dependent care credit

  • Earned income tax credit

  • Adoption credit

  • Saver’s credit

  • Foreign tax credit

  • Residential energy credits

  • Electric Vehicle credit

  • Education credits

Common Pitfalls of Tax Write-Offs

If you’re on social media at all, and chance upon anyone discussing Section 179 of the tax code to take their G-Wagons as a tax write-off, then you’ve likely stumbled across some unreliable information. The whole point of tax deductions is to help legitimate businesses and individuals reduce the amount they owe by showing they had legitimate business expenses that shouldn’t be counted toward their taxable income. Many of these social media accounts suggest that if you buy a vehicle weighing over 6,000 pounds, and use it in your business, you can write off the entire purchase price of the car as a business expense. While they may be doing it, they are risking a tax audit and are likely not using that vehicle exclusively for business purposes. This Tik Tok content creator, who is a CPA, has a good breakdown of this dubious practice.

More generally, if you have a business, you need to make sure you keep record of your expenses and can prove that they’re legitimate expenses needed to run your business. Best practice is to always consult and hire an accountant to help you with your taxes if you are confused or are unsure of what deductions and credits you can take.