A man using a calculator to figure out tax write-offs
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How Does a Tax Write-Off Work and Does the IRS Allow It?

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Jan. 28 2022, Published 11:25 a.m. ET

A tax is a burden to most people. As a result, many people look for ways to try to minimize their tax liability. But people have gone to prison for trying to avoid taxes. If you’ve heard talks about a tax write-off, you might wonder what it is, how it works, and whether the IRS allows it.

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Everyone wants to be right with the IRS because it could turn your life into a nightmare if you break the rules. For example, missing the IRS tax filing deadline can expose you to significant penalties.

People dread running afoul of the IRS so much that when Congress passed Biden’s infrastructure spending package, crypto prices fell across the board. The package includes complex crypto tax provisions that will go into effect in 2024. You can still trade cryptocurrencies and minimize your tax exposure without getting into trouble with the IRS, and that starts with taking advantage of tax deductions.

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What is a tax write-off?

There are types of expenses that you might be able to subtract from your income and reduce how much you have to pay in taxes. These are called tax deductions and they write off part of your tax bill. The IRS sets the rule on how to use deductions.

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Many people don’t even know they qualify for deductions and they end up bearing a greater tax burden than they should. You don’t want to be ignorant of tax write-offs when they can give you some relief in dealing with a mortgage, student loan debt, or saving for retirement.

How does a tax write-off work?

You can only deduct expenses that the IRS allows to reduce your taxable income. Claiming tax deductions available to you is perfectly fine and you can be confident that you aren't breaking IRS rules. Still, it’s important to know your limits when seeking tax write-offs.

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If you donate to a charity, you can subtract the donation from your taxable income. Your tax would be calculated on a smaller amount, so your bill would be lower. Donation deductions can also reduce your income so that you drop to a lower tax bracket and save even more on taxes. But you can only subtract donations up to 60 percent of your adjustable gross income.

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If you incurred a huge medical expense that isn't covered by insurance, you can reduce your taxable income by that amount. The IRS allows deductions of out-of-pocket medical bills that exceed 7.5 percent of a person’s income.

There are other tax deduction opportunities that you might be missing.

Those servicing student loans can claim deductions on the interest they pay. The IRS allows you to subtract interest paid on student loans you took out for yourself, a spouse, or dependent from your taxable income. You can claim tax deductions of up to $2,500 a year on student loan interest. However, payments on the principal aren’t tax-deductible, although some are pushing for it.

Those servicing a mortgage can also deduct interests on up to $750,000 of the debt. If you’re saving for retirement, a traditional IRA allows you to make a tax-free contribution, but you’ll need to pay taxes when you start taking withdrawals. People running a home office can also deduct certain business expenses.

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