Refrain from mixing up tax write-offs and tax credits. (Photo: CBNC)
The goal of tax season is to pay as little money to the government as legally possible while keeping as much of your income as possible for yourself. Write-offs are one of the most effective ways to accomplish this goal. Average taxpayers can save hundreds or even thousands of dollars by knowing what to write off in which situations, either by lowering their tax bills or topping off their refunds.
Refrain from mixing up tax write-offs and tax credits.
Tax write-offs are often referred to as tax deductions, which is fine because the two terms are interchangeable. However, some people use the terms “deductions” or “write-offs” interchangeably with “tax credits,” which are not the same thing.
Tax credits reduce your tax bill dollar for dollar or, if refundable, increase your refund. For example, if you owe the IRS $800 but have $1,800 left over from the second half of your $3,600 child tax credit for one child under six, you’d receive a $1,000 refund.
READ ALSO: Tax Season 2023: Best Prepaid Cards To Use For Your Tax Refunds
Refrain from mixing up tax write-offs and tax credits. (Photo: Oyster)
Deductions, on the other hand, do not reduce your bill directly. Instead, they allow you to “write off” qualifying expenses to reduce your taxable income — that is, the percentage of your earnings that the IRS can claim.
How Do Write-Offs Help You Save Money?
Bench Accounting provides the following example of an independent contractor earning $60,000 in 2022:
- The self-employment tax of 15.3% is $8,478.
- The income tax is $4,865 based on the contractor’s tax rate.
- The total amount owed in taxes is $13,343.
The freelancer’s taxable income drops to $54,000 after claiming $6,000 in qualifying for write-offs, which changes the entire equation. It does not lower the tax bill in the same way that a tax credit would, but it does provide significant relief:
- The self-employment tax is reduced to $7,630.
- The income tax is reduced to $4,200.
- The total tax bill is reduced to $11,830, a $1,513 savings.
READ ALSO: Here’s How To Claim Your 2023 Earned Income Tax Credit (EITC)
