Tax Write-Offs Made Easy: Tips to Maximize Your Credits and Deductions
By Kathy Yakal – April 2, 2024
What’s the best part of doing taxes? Getting some of your money back. We’re here to help make sure you’re dealing with credits and deductions the right way.
(Credit: Getty Images/d3sign)
Income is usually pretty easy to report on your income taxes. You get a W-2 and maybe some 1099s summarizing the year’s earnings. If you run a small business or have a side gig, your annual pay might even be tracked and reported by a third party, like a bank or payment processor.
But what about your expenses, the money spent that you can write off? You might have a shoebox full of receipts and other documents that can prove to the IRS (if you’re audited) that you spent money on tax-deductible items or services. It doesn’t matter whether you’re a power user of DIY online tax software or you prefer to have forms and schedules spread out on your dining room table as you plow through Form 1040 manually. You still have to document and organize all the expenditures necessary to operate your business.
How do you manage all the “ordinary and necessary” expenses, as the IRS puts it? We’re here with some tips to make it easier.
What Tax Write-Offs Are Deductible?
There are two types of write-offs: tax credits and deductions. Tax credits are always preferable to tax deductions because they reduce your total tax liability dollar for dollar. Deductions merely lower your adjusted gross income (AGI, your taxable income), which can make your tax bill smaller. The size of a deduction is tied to your income tax bracket.
Tax write-offs fall into several categories on IRS Form 1040. They relate to elements of your individual and business financial life, including the following:
- Your home: Property taxes, mortgage interest, mortgage insurance premiums, disaster casualty and thefts, mortgage interest credit, and military moving expenses
- Your health: Medical and dental expenses, Premium Tax Credit, HSAs, and MSAs
- Your dependents: Child tax credit, child care credit, and qualified adoption expenses
- Your education: College tuition expenses, student loan interest, teacher expenses, 529 plans (you take this deduction on your state return), American Opportunity tax credit, and Lifetime Learning Credit
- Your retirement: Some investment interest, IRA contributions, self-employed retirement contributions, and retirement savings credit
- Your conservation practices: Home energy credit, electric vehicle credit, alternative fuel vehicle refueling property credit, and investment credit
- Your small business: Some employee business expenses, common business expenses, small employer health insurance premiums, home office expenses, vehicle expenses, depreciable assets, Qualified Business Income deduction, some self-employment tax deductions, and Section 179 carryover
- Miscellaneous situations: Donations to charities, earned income credit, credit for elderly or disabled, and gambling losses
What Should You Save to Prove What You Paid?
Some of the proof the IRS wants to see that you paid what you said you did comes through the US Mail. Starting in January, you may receive many envelopes that say something like “Important tax information enclosed.” Or you may get some forms electronically. Look at all of them, even if you don’t recognize the sender. Some are probably related to your income, but others prove that you’re eligible for a particular credit or deduction, like:
- Form 1098 (mortgage interest)
- Form 1098-T (college tuition expenses)
- Form 1098-E (and student loan interest)
- Form 1095-A (Premium Tax Credit for health insurance purchased through the Marketplace)
(Credit: IRS)
In some cases, you may already have the form required. For example, your state or local government may have issued you a Mortgage Credit Certificate that could qualify you for the Mortgage Interest Credit, which is designed to help low-income individuals afford homes.
What If There’s No Official Tax Expense Document?
Some deduction documentation doesn’t come from an external source with an annual total. For example, if you donated to a charity, you probably received a receipt immediately following your contribution. If you didn’t and plan to claim it, you need to contact the nonprofit.
Medical expenses are another potential write-off, but you can’t claim them unless they total more than 7.5% of your AGI. Every medical practice has its own billing and payment procedure, so collecting statements can amount to a lot of paperwork. You may be able to get an annual summary from sources like your health insurance company, pharmacy, hospital, or clinic, but there will probably be miscellaneous payments you need to track.
Can You Write Off Work-Related Tax Expenses?
If you operate a small business or do gig work, you may be in for some challenging bookkeeping. While much of your work-related income will probably be reported to you on a Form 1099-NEC, 1099-K, or 1099-MISC, it’s up to you to track your deductible expenses.
You should have a receipt, credit card bill, bank statement, or other written documentation for every penny you spend operating your trade or business. Don’t submit them to the IRS with your tax return. Just keep them safe for a minimum of three years.
The IRS says you can claim “ordinary and necessary” expenses, so use your best judgment or consult an accounting professional. Deduct everything you can without pushing it. Your rationale will be scrutinized if you’re ever the subject of an IRS audit.
What’s the Best Way to Organize and Store Tax Expense Documentation?
At the very least, use a manual method. Label folders or large envelopes by month or expense category, and store all your paper receipts. If you have electronic receipts, store them in dedicated folders or use a cloud storage service.
If you really want to be organized and save time during tax preparation, consider creating a spreadsheet in Excel or Google Sheets for all your expenses—and update it daily or weekly. Keeping a spreadsheet saves you the trouble of thumbing through stacks of receipts, credit card bills, and other papers when it’s time to do your taxes.
Every entry in your spreadsheet should include the date, vendor, amount, and tax category (like office supplies, advertising, and car expenses). They will go on Schedule C when you prepare your taxes. If you’re new to self-employment, take a look at Schedule C to explore what the IRS expects to see here.
Can You Use Software to Track Tax Expenses?
Personal finance apps and small business accounting software can save time and provide a path to organized expense files. You can connect your online bank accounts to them and automatically import transactions. These applications show your transactions in registers that list the date, category of the expense, and sometimes other details. Some apps make educated guesses and suggest categories that might fit your various expenses. They at least provide lists of tax-related categories so you can select the appropriate one.
Some, like Intuit QuickBooks Online and Zoho Books, let you snap photos of receipts with your phone and turn them into expenses in the app. Some also allow you to create customized transaction reports.
How Do You Get Your Write-Offs Onto Your Tax Return?
If you’ve been updating your business expense spreadsheet or doing your accounting in Intuit QuickBooks Online (which does a beautiful job of summarizing your tax write-offs), you just have to transfer your category totals to Schedule C on your return. Intuit TurboTax and other tax prep apps walk you through Schedule C, but like the IRS paper form, they only provide fields for category totals.
There’s no getting around the process of adding up all the expenses you incurred running your business, so get your calculator ready (unless you’re using a spreadsheet) if you’re a small businessperson who files Form 1040. It’s part of the process of claiming tax write-offs to offset your self-employment income. But your careful work can lower your tax liability substantially.
For more tax tips, read up on ways to start minimizing next year’s taxes now.
Source – https://www.pcmag.com/explainers/tips-to-maximize-tax-write-offs