Common tax write-offs: What are they and how can they affect your tax bill?
Editorial staff, J.P. Morgan Wealth Management
- Taxpayers can reduce the amount of U.S. federal income taxes they owe and pay by utilizing available tax deductions or tax credits (“tax write-offs”).
- Most taxpayers can choose between the standard deduction or itemized deductions when preparing their U.S. federal income tax returns – whichever saves the most money.
- Some popular write-offs include deductions on tax-advantaged retirement accounts and the child tax credit.
Americans pay taxes in many places on many activities. State, city and federal governments may impose taxes on income, purchases, real estate transactions and capital gains – just to name a few.
Taxes in the U.S. are so complex that a billion-dollar industry exists to help you figure out what you owe! A tax professional or tax preparation software can help you, but to do their job, they need some information to establish what U.S. federal income tax write-offs may be available to you and which you are eligible to take. We’ll walk you through some of the most common tax write-offs and answer some pressing questions about the topic.
What is the difference between a tax deduction and tax credit?
Tax write-offs come in two forms: tax deductions and tax credits.
In calculating your tax liability, tax deductions may reduce the amount of income on which you’re subject to tax. The IRS calls your taxable income Adjusted Gross Income (AGI), and it consists of “gross income minus adjustments to income,” which is your wages, dividends, capital gains, business income, retirement distributions and other income minus certain expenses, like expenses paid out of pocket by educators, student loan interest, alimony payments or contributions to a retirement account.
A tax credit may be applied directly against and directly reduce your tax liability, so if your tax bill is $10,000 and you have a $1,000 available tax credit, your final bill is $9,000. A tax credit can reduce your tax bill on a dollar-for-dollar basis, whereas a tax deduction reduces your tax bill based on the tax rate that applies to the taxable income that is reduced by the deduction.
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Common tax deductions
Common tax write-offs for U.S. federal income tax purposes include the standard deduction, which is a flat amount that most taxpayers are allowed to claim without having to keep track of any expenses, and itemized deductions for things like mortgage interest, state and local taxes, and contributions to tax-advantaged retirement accounts like 401(k)s and traditional IRAs.
The 2017 Tax Cuts and Jobs Act (TCJA) raised the standard deduction for everyone while reducing and eliminating some itemized deductions. For the 2024 tax year, the standard deduction was $14,600 for single filers and $29,200 for married couples filing jointly. For the 2025 tax year, the standard deduction increased to $15,000 for single filers and $30,000 for married couples filing jointly. In some cases, taking the standard deduction can reduce your AGI enough to keep you in a lower marginal tax bracket, and it’s generally a lot simpler than taking itemized deductions.
On the other hand, if you have a mortgage, contribute to a retirement account or make frequent charitable donations, you may owe less tax by itemizing your deductions instead of taking the standard deduction. If you use tax preparation software or employ a tax preparer to calculate what you owe, run the numbers both with your itemized deductions and using the standard deduction to see which saves you more money.
Some itemized deductions have been restricted by the TCJA that was passed over seven years ago. For example, the State and Local Tax deduction (SALT) used to be unlimited, so people who lived in high-tax jurisdictions like New York City or San Francisco could deduct their entire state and local taxes from their Federal AGI. Now, however, the SALT deduction is generally limited to $10,000.
Mortgage interest is another common deduction that was limited by the TCJA. Currently, homeowners that are married filing jointly can deduct the interest on mortgages up to $1 million if they bought their home before December 16, 2017, and they can deduct the interest on the first $750,000 of their mortgage if it was originated after that date.
Common tax credits
As noted above, a tax credit may be credited against and reduce the tax liability you owe. Some credits are even refundable, meaning you could get a check from the government even if you don’t owe any tax. But this is not the case for the great majority of taxpayers.
- One common tax credit is the Child Tax Credit. This is a credit available to individuals or couples filing jointly for each qualifying child they have. For tax year 2024, the maximum Child Tax Credit is $2,000 per child for dependents 17 and under. The credit was created for families on the lower end of the income spectrum, and the more money you make, the less the credit may be worth. Depending on a person’s AGI, the tax credit gradually phases out and can be phased out completely.
- The Child and Dependent Care Tax Credit covers a portion of childcare costs. For 2024, and depending on a taxpayer’s AGI, this tax credit may be available (up to a maximum of $3,000) for a portion of childcare costs for a taxpayer who paid someone, such as a daycare provider, to care for a qualifying individual, such as a dependent child under the age of 13, for example.
- The Saver’s Tax Credit is determined based on a percentage of contributions made to an IRA, 401(k), 403(b) or certain other retirement plans. The amount you may receive as a credit depends on your filing status (married or single) and your income, with earners above a certain threshold not qualifying for this credit.
- The IRS also gives owners of residential homes a credit based on the cost of property purchased by the owner that are intended to improve energy efficiency. Items such as rooftop solar panels and geothermal heat pumps placed in service after December 31, 2019, and before January 1, 2023, receive a tax credit equal to 26% of the cost of the property. The credit is reduced to 22% of the value of the improvement if it was placed in service after December 31, 2022, and before January 1, 2024.
The bottom line
For some taxpayers, for example those who have many sources of income, own property and have children, it can be very helpful to hire a tax preparation professional or use advanced tax prep software to try to get the most out of their available tax write-offs, including by looking at potential itemized deductions. For some taxpayers, for example those that are younger, rent, don’t have a lot of student loan debt, have no children and only one source of income, the standard deduction may be greater than available itemized deductions. Lastly, it’s important to remember that everyone’s circumstances are unique, so each taxpayer should consult with a tax professional for questions regarding their particular circumstances, including all the rules of each applicable state, which may vary from state to state and are subject to change.
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Editorial staff, J.P. Morgan Wealth Management
