eli5: what are tax write offs?

Question

im autistic and have reading disabilities so i dont understand anything google says 🥲

In: 0

Answer 1

In my opinion it’s easiest to explain in terms of business.

Generally if you get money or things of value, it is considered income (with one big exception being gifts, but that’s a discussion for another time). If you mow the lawn and someone gives you $10 for it, you should pay income tax on the $10 – you give a few dollars of it to the government.

In business, however, you often have to spend money to make money. If you spend $1000 on widgets and then sell the widgets for $1010, you’re only left $10 richer than before, so the government says ok, $10 is your income and you give a few dollars of it to the government similar to mowing the lawn.

You could think of that as [phone]=10. That -1000 part is called a tax “deduction” and is what most people mean when they say tax write-off. If you look at what happens with and without deduction… Say your marginal tax rate is 50% (half of income). Without the deduction tax on 1010 would be 505, with the deduction it would be 5, so the tax write off of $1000 “saved” you $500, or 50% of the write off. If you do similar math for 30%, it would be 303 vs 3 or $300 saved, again 30% of the deduction.

**So in short a deduction of $x saves you tax money in the amount of $x times your marginal tax rate, and most of the time people saying tax write off are talking about deductions.**

Controversial things would be when it isn’t clear that the deduction is really for cost of doing business (if you spend $1 on widgets and sell them for $1010, and then spend $1000 on a brand new plasma TV you use only in your home for watching shows unrelated to your widgets, people would argue that you don’t deserve that tax write off), or when the government gives deductions like this for personal income that they disagree with (if a rich person gives $10 million to a charity owned by a friend who will eventually return the favor off the books and have 50% marginal tax rates, they could save $5 million basically for free).