Tax Write Offs
What is Tax Deductible?
It has been a chore for taxpayers to do their own taxes every fiscal period and sometimes, the calculated amount can be debilitating. Reducing the amount of federal tax or state tax paid from taxable income is possible through many ways before tax filing begins. There are tax breaks (tax exemptions, tax shelters, tax credit and tax deduction) and there are tax write offs.
Just like the other ways to reduce taxes, the federal government designed tax write offs as a reward system to lessen tax liabilities and also a way to encourage taxpayers to do a good deed by donating sums of their income to organizations that are in need. Many big multinational companies donate millions of dollars every year to charitable institutions to be able to write off those amounts from their taxable income and would subsequently be able to lower their tax liabilities upon tax filing. This is not a form of tax evasion, if done legitimately and with proper documentation.
Planning tax write offs ahead of time before tax filing can basically save the taxpayer a considerable amount of money depending on the individual annual income, especially for those who are in the second tax bracket. For those earning a higher annual income, they automatically fall under a higher tax rate. To be able to lower down and have less tax rate, tax write offs and other forms tax breaks are designed to lower their federal tax or state tax.
Tax write offs are not just ways in reducing federal tax or state tax liabilities during fiscal periods. Tax laws invariably change and so as acceptable write offs. A very good example of a tax write off is donating an amount to charitable institutions, allowing the individual to write off on his or her taxable income (taxpayer’s total gross income).
It is better to consider tax write offs as tax credits rather than tax deductions though. The deductable amount, if applied as tax credit after calculating for the federal tax or state tax is done, can further reduce tax liabilities. Tax credits are different from tax deductions although it acts the same way as any other tax breaks. Taxable income is further reduced when standard deductions have been applied and the income tax has been adjusted. An additional deduction percentage is applied after calculations to come up with a reasonable federal tax or state tax amount. Tax credit also includes previously paid amounts that will be carried over as deduction on present taxable income after tax filing.
The Internal Revenue Service (IRS) has come up with a list of standard deductions and allowed tax credit and tax write offs available for correct tax filing. Standard deductions vary depending on the taxpayer’s civil status, number of dependents or whether the taxpayer is the head of the family or not. Itemized deductions or tax breaks are expenses incurred that exceed 7.5 percent of the total gross income from the allowed standard deductions by the IRS. Examples of itemized deductions are educational expenses, mortgage interest payments, charitable donations, pension or retirement plans and medical expenses.
Taxpayers can be granted a tax write off for educational expenses, work-related expenses, mortgage interest payments and charitable donations, but everything needed to be documented or supported by legal documents and/or receipts. Sometimes, business trips related to work can be filed as a tax write off if done outside the ‘tax home’ or the country where one pays his or her federal tax or state tax.
Some people, in their desire to lessen their federal tax or state tax, would want to try and write off their personal trips as business trips to take back their losses. Only business-related trips are qualified as legal tax write offs for tax filing by the IRS. Combining personal trips with business trips are usually done during conventions, conferences or trade shows that will benefit the business. However, it must be outside the country and longer than a week with only a quarter of the time spent in personal stuff. For further details, it is advised to consult a federal tax or state tax expert or read on the IRS guide on Travel, Entertainment, Gift and Car Expenses.
Some people believe that the tax write offs can be used to increase income tax return. This is totally incorrect. Like other forms of tax breaks, tax write offs only serves to lower federal tax or state tax. Any further tax write offs are deemed useless once tax liabilities reach zero. Income tax returns can only be increased when a taxpayer earn income credits upon tax filing.
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