Using Tax Write-Offs to Lower Taxes
Although there is no Internal Revenue Service (IRS) master list of deductions, tax law and the courts have established tax breaks in several categories. Whether you are writing off small business expenses, medical costs, or taxes paid, the deductions you take lower your tax liability.
The table below gives a quick overview of the most common deduction categories and a few examples of each type.
Home improvement write-offs
State and local tax write-offs
Exploring common income tax deductions
Tax write-offs fall into several categories. These are the most common:
Job-related training, work uniforms, and equipment that is used only for business are all deductible expenses. You can also write off travel expenses and meals or entertainment or business purposes. However, you must back up your claims with proof. Make notes on the receipt: who you met with, their company affiliation, and what you discussed during the event.
Using your home for business
If you use your home for business, whether you are self-employed, an employee, or a partner, you may be able to deduct home business expenses. This deduction is strictly for the particular section of your home that is used for business purposes.
In order to use the home as a business deduction, the home must be used as one of the following:
- Be used as a place of business specifically tied to your business or trade;
- Be used as a place where you regularly meet and deal with clients or customers;
- Alternatively, be a separate structure not attached to your home but is regularly used in your business or trade.
The IRS implemented the simplified option for calculating the business use of your home for taxable years starting on January 1, 2013. This option allows a taxpayer to take the square footage of their office and multiply it by a predetermined rate instead of figuring out actual expenses. By using the optional method, you can deduct $5 for every square foot of your home office. The deduction is capped at $1,500 per year, so can be used for home offices up to 300 square feet.
A big plus is that you do not have to keep records of home office expenses such as rent, utilities, mortgage payments, real estate taxes, or casualty losses. Form 8829 is not required to be completed.
Taxpayers can choose the regular method (required for tax years 2012 and earlier) instead of the optional method, but still must calculate actual expenses incurred for their home office. Such expenses could include mortgage interest, insurance, utilities, repairs, and depreciation. When using the regular method, deductions are based on the percentage of the home used for business purposes. You need to keep good records of your home expenses, allocate the expenses between business and personal use, and complete IRS Form 8829.
If you are considering using the optional method, you should calculate the deduction using both methods and use the method that provides the largest deduction.
Using a car for business
You can generally figure the amount of your deductible car expense by using one of two methods: the standard mileage rate method or the actual expense method. If you qualify to use both methods, you may want to figure your deduction both ways before choosing a method to see which one gives you a larger deduction.
Standard mileage rate: for the current standard mileage rate, refer to Publication 463, Travel, Entertainment, Gift, and Car Expenses, or search standard mileage rates on IRS.gov. To use the standard mileage rate, you must own or lease the car and:
Must not operate five or more cars at the same time, as in a fleet operation;
Must not have claimed a depreciation deduction for the car using any method other than straight-line;
Must not have claimed a Section 179 deduction on the car;
Must not have claimed the special depreciation allowance on the car;
Must not have claimed actual expenses after 1997 for a car you lease, and
Can't be a rural mail carrier who has received a "qualified reimbursement."
To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses (more on "actual expenses" in a bit).
For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.
Actual expenses: to use the actual expense method, you must determine what it actually costs to operate the car for the portion of the overall use of the car that's business use. Include gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments) attributable to the portion of the total miles driven that are business miles.
Note: Other car expenses for parking fees and tolls attributable to business use are separately deductible, whether you use the standard mileage rate or actual expenses.
Generally, the Modified Accelerated Cost Recovery System (MACRS) is the only depreciation method that can be used by car owners to depreciate any car placed in service after 1986. If, however, you used the standard mileage rate in the year you place the car in service and change to the actual expense method in a later year and before your car is fully depreciated, you must use straight-line depreciation over the estimated remaining useful life of the car. There are limits on how much depreciation you can deduct. For additional information on the depreciation limits, please refer to Topic 704. Publication 463, Travel, Entertainment, Gift, and Car Expenses, explains the depreciation limits and discusses special rules applicable to leased cars.
If you have a vehicle for business-related travel, you may deduct the entire cost to operate the vehicle. However, you must keep proper records of the cost to operate the vehicle. This includes gas, oil, tires, repairs, registration fees, lease payments, license and registration fees and mileage driven for business purposes.
You can also use a personal vehicle for business purposes. However, you will need to keep detailed records separating the costs for personal vs. business use.
New job search
If you are looking for a new job, you can deduct your expenses regardless of whether you find employment. Per the IRS website, the costs to search for a job must be for the same type of work you are currently working. You cannot deduct expenses to look for a new occupation or career. You are not allowed to deduct expenses to search for a first job. Also, to be eligible for job search deductions there cannot be a long break between leaving the last job and looking for a new job. If the costs get reimbursed to you from any source, these expenses are not deductible:
- Résumé costs. This includes if you pay someone to prepare a resume or the supplies it took to prepare it yourself. You can deduct the cost of even mailing your résumé.
- Travel expenses. These expenses include travel fare, plane, rental car, mileage, lodging, and food during the trip. The deductions for the trip must be mainly for a job search; if you are splitting your time between searching for a job and something else, you can only deduct the job search.
- Placement agency. If you hire a placement agency, you can deduct some, and often all of the fees you paid.
- Relocation. If your new job requires you to relocate, your moving expenses may be deductible if the relocation is over 50 miles from the former home. Job relocation expenses are considered an above-the-line deduction, which means you do not have to itemize deductions to use it. However, if these expenses are reimbursed to you from your employer or soon-to-be employer, they will not qualify for a tax write off.
- Job search expenses are deducted on a Schedule A Itemized Deductions form as a miscellaneous deduction.
Are you donating gently-used clothing to a shelter or charity-based thrift shop? Get a receipt for the fair market value of the items. Their value is assessed at rummage/garage sale prices, so do not expect full price. Regular contributions can add up quickly. Cash gifts are also deductible.
For cash, check or other monetary gift contributions, you must maintain a record of the contribution regardless of the amount. The best form of documentation is a bank record or a written receipt or acknowledgment from the organization. A written statement needs to have the organization's name, date of contribution and the amount.
If you donate property, you generally can deduct the fair market value of that property.
In most cases, your deduction cannot exceed 50 percent of your adjusted gross income (AGI); some donations cannot exceed 30 percent of your AGI.
If you own your home and carry a mortgage, you can deduct either points or mortgage interest on your tax return. The loan must be under $1 million for married couples who file joint returns; the limit for couples who file separately is $500,000.
Although it is not exactly a deduction, you can exclude some of the profit from the sale of your home. Individuals can exclude up to $250,000 of profit; married joint filers can exclude up to twice as much.
Home renovations may qualify as a tax write-off, provided they are for medical reasons. Adding wheelchair ramps or lowering cabinets to improve accessibility are examples of eligible expenses. However, you cannot claim a deduction if the renovation raises your home’s value.
Most medical expenses are deductible, including treatment for both physical, dental and mental health. As long as the total medical costs are over 10% of your adjusted AGI if you are under 65 years old or 7.5% for over 65, you can itemize and claim these medical deductions. As a rule, you cannot use cosmetic procedures as a tax write-off. On the other hand, if surgery is required to treat a disease or correct a deformity, it is deductible.
Medical expenses include diagnosis, cure, treatment and prevention of disease or illness affecting the body.
Deductible medical expenses may include but aren't limited to the following:
- Any co-payment or fees paid to doctors, surgeons, chiropractors dentists, psychiatrists, psychologists
- Residents in a nursing home or inpatient hospital stay
- Medications when a prescription is required. This includes insulin.
- Payments made to drug or alcohol addiction, or smoking-cessation programs. Also included is prescription medication used to curb or alleviate withdrawal symptoms.
- Fees paid for weight-loss program participation when obesity is diagnosed by a physician. This does not include, health club fees or food used to diet.
- Transportation costs to a medical facility in conjunction with a chronic disease when treatment is necessary. This deduction can be used for you, your spouse, or dependents.
- Payments for dentures, hearing aids, reading or prescription eyeglasses or contact lenses, crutches, wheelchairs or any medical equipment that is needed.
- Payments made for the care of a service animal when needed to assist a person with physical disabilities. This includes visually impaired and hearing disabled persons.
Tax deductible medical expenses include more than doctor visits and hospital care. Many do not realize that costs for transportation essential to medical care are tax deductible expenses. This includes taxi, bus, or train fares, ambulance costs, or transportation by personal car. Just about any out-of-pocket expenses used to operate the transportation, such as gas, oil and parking, and toll fees can be itemized. The standard mileage rate for medical expenses can also be taken when itemizing deductions.
If you are self-employed, there is a self-employed health insurance deduction that may come in handy. This is actually an adjustment to income, instead of an itemized deduction, for health insurance premiums to cover medical care. This adjustment includes qualified long-term care insurance, for yourself, your spouse, and dependents.
Some business deductions are unique to self-employed individuals. Good recordkeeping is vital; the IRS tends to scrutinize self-employment deductions. You may be able to deduct these items:
- Business loan interest
- Part of your health insurance premiums
- Business property rentals, such as a storefront
- Utilities and rent for office space
- Business taxes and license fees
State and local taxes
Did you know that state and local sales tax are deductible? Since the IRS has tables that list the deduction for each state and income level, you will not have to keep receipts to document your claim. If you choose to enter your state and local sales tax that you paid without using the pre-calculated method based on income, you will need to retain copies of all receipts for which you are claiming the sales tax deduction.
All receipts need to be kept if a taxpayer is not using the pre-calculated method based on income. In the event of an IRS audit, the taxpayer must have the proof/receipts or the deduction will be disallowed. You will need a receipt for big ticket items like a boat, vehicle, or airplane. You can add the tax for these items to the amount the IRS allows.
Keep your receipt for paid property taxes, too. Both state and local property taxes are legitimate deductions. Some tax write-offs include taxes paid to foreign governments. If you paid foreign, state or local real estate or income taxes during the last tax year, you could claim them as a deduction.
Finding unusual tax deductions
Most of the time, unusual tax deductions are red flags that can trigger an audit. However, a few people have successfully argued their case in court. Here are some of the zaniest tax deductions the tax courts have allowed.
One exotic dancer claimed her implants as a tax deduction. The IRS disallowed it, saying it was a cosmetic procedure. In Hess vs. Commissioner, she argued that the enhancement constituted a stage prop for her business – and won.
When Herbert Cherry’s doctor ordered him to exercise as part of his emphysema treatment, he installed a swimming pool and claimed it as a medical expense on his tax return. The tax court ruled that because it was part of his treatment, it was an allowable deduction. He even got to write off part of the upkeep. Thanks to the precedent he set, other taxpayers can also use this loophole. Make sure a doctor signs off on it, though.
Corey Weir, a professional bodybuilder, deducted gallons of body oil on his tax return. Since it the cost was directly related to his profession, the tax court ruled it a legitimate expense. However, this tax break is not likely to work for everyone.
In the 1970s, one gas station decided to offer free beer instead of promotional stamps. The owners claimed the expense as a deduction. Although the IRS disagreed, the tax court ruled it was a business-related promotional expense.
Although IRS publications say babysitting expenses are not deductible, one woman did it anyway. She hired a childcare provider so she could volunteer time at a charitable organization, then claimed her expense as a tax write-off. The tax court agreed.
At the end of the day, if an expense contributes meaningfully or materially to your business, it may be eligible for use as a deduction.
Getting the best bang for your buck
Make the most of your income tax deductions by focusing on these three items:
Retirement plan contributions
Depositing savings in a traditional Individual Retirement Arrangement (IRA) can save you thousands of dollars in taxes. You do not have to itemize to take advantage of this deduction. The IRS also gives you until mid-April to make contributions for the previous tax year. You can use this loophole to make a last-minute adjustment to your income tax liability.
401(k) is funded with pretax money and is one way to utilize paying a lower tax on income. You will have to pay taxes once you withdraw the 401(k) or when you retire. With a Roth 401(k) you pay tax on contributions but not when you withdraw at retirement.
An HSA allows owners to pay current health care expenses and save for future expenses. The advantage is contributions are tax-deductible and pretax if they are made through a payroll deduction and the interest earned is tax-free. Also, account owners may make tax-free withdrawals for qualified medical expenses.
Since you can donate – and deduct – up to half of your AGI, this write-off can significantly lower your tax bill. Donate to registered 501(c)(3) organizations and get a receipt. You cannot take the standard deduction and use this tax write off; you must itemize.
Home-related tax deductions
Between mortgage insurance, property taxes, and mortgage interest, homeowner tax savings can stack up quickly. If you own your home, make sure you take advantage of these itemized deductions.
Mortgage insurance: mortgage insurance usually comes into play if your down payment was less than 20% of your home’s purchase price. These premiums for mortgage insurance is treated as mortgage interest and are tax deductible on a Schedule A of Form 1040. However, there is a cap for high income earners with adjusted gross income of more than $109,000 or more than $54,500 for married couples.
Property taxes: property taxes are deductible the year they are paid, not the year they were due. For the most part property taxes are always deductible, except when escrow is holding your money to pay taxes. If you have money held up in escrow, you cannot claim the property tax deduction until the money is taken out and the taxes are paid.
Mortgage interest: one of the largest tax deductions is mortgage interest. You can deduct interest payments on your primary home, and often on a second residence up to $1 million. If you are married filing separately, the cap is $500,000. This deduction applies to mortgage refinances, home equity lines of credit, and home loan purchases.
Avoiding overpaying Uncle Sam
Can you use these deductions? The answer depends on whether you qualify for that deduction. For example, you cannot deduct job search expenses if you are looking for your first job. Or, you cannot deduct construction tools if your business is a marketing company.
The IRS has specific instructions regarding what is allowed for each deduction. For some, you may have to meet multiple requirements. It is important to periodically review your taxes with an accountant or other tax professional to make sure you are not overpaying. If you need assistance with your return, ask an Expert. Verified tax Experts provide customized, one-on-one answers to your questions.