Nearly half of American households don't pay any federal income tax, according to the Tax Policy Center. That means people either don't make much money each year or the filers do an excellent job of taking deductions to reduce taxable income. The trick to getting the most tax write-offs is knowing the tried-and-true deductions and skimming the new deductions from the IRS Newsroom (see Resosurces) each year to reduce your tax bill.
A write-off means a deduction from your gross income -- the amount you make before adjusting, subtracting, deducting or reducing the amount using formulas or legal write-offs. The Internal Revenue Service groups write-offs into personal deductions and the things you write off related to your work for an employer or your personal business. The agency also allows standard deductions at a flat rate or itemized deductions. Itemizing allows you to take as many write-offs as you can find -- and qualify for. The IRS gives taxpayer a set of instructions in the form of an online download or an old-school booklet so everyone is on the same page for write-offs. Understanding the tax language, however, requires some interpretation for many taxpayers; consult an accountant or a tax preparation service if you need help.
The practical definition of a tax write-off means you reduce your taxable income, which means you pay fewer taxes to local, state or federal governments. The more write-offs, the more money you keep to spend on the finer things in life -- like a new car, summer vacations and dining out. Some business write-offs align well with the finer things, including writing off trips in your fancy ride as a company expense. The IRS requires your employment to be undertaken with the intention of making a profit, however; hobby expenses don't qualify for write-offs.
The IRS makes the final decision to accept your tax write-offs. The official tax code has standard write-offs, such as a deduction for your home mortgage interest, and flat basic exemptions for you, your spouse and your children. Tax preparers and attorneys know all the ins and outs of write-offs, but some DIY preparers study deductions and take all available write-offs, including totaling all the retail sales taxes paid during the year to deduct from their taxable income. That means saving all the receipts for everything you buy during the year -- just in case you're invited to a tax audit. Some overlooked federal deductions include moving for employment, charity donations, job-hunting costs and student-loan interest.
Taking a shot at a tax write-off means risking some stiff penalties when the IRS doesn't look at the deduction the same way you do. You'll pay the extra tax due, conveniently calculated by an IRS agent, plus interest on that amount from the time your taxes were due. You'll also have a penalty, if the IRS thinks you were out to get something you didn't deserve. When it looks like an accidental deduction, you might get by with a slap on the wrist in the form of a stern letter -- and a bill for the extra interest. If it's a huge deduction mistake, and the IRS took time in reviewing your tax forms, you could owe some serious interest.
- Center on Budget and Policy Priorities: Misconceptions and Realities About Who Pays Taxes
- Kiplinger: The Most-Overlooked Tax Deductions
- Internal Revenue Manual: Return Related Penalties
- IRS: Business or Hobby? Answer Has Implications for Deductions
- MSN Money: 10 Big Deductions Too Many of Us Miss
- IRS: Standard Deduction
- NPR: Romney's Wrong and Right About the '47 Percent'
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