Last-Minute Tax Write-Offs To Consider

Article Summary

Last-minute tax write-offs offer critical opportunities for U.S. taxpayers to reduce taxable income before filing deadlines, impacting cash flow, compliance risks, and long-term financial planning. Individuals (particularly freelancers, investors, homeowners, and high-medical-cost filers) and businesses (especially pass-through entities, startups, and self-employed taxpayers) face unique challenges, including strict eligibility thresholds, complex documentation rules, and the ongoing effects of the Tax Cuts and Jobs Act (TCJA). Timing, substantiation, and understanding federal/state interaction are central concerns—e.g., California limits some TCJA provisions, while Texas has no income tax but strict sales tax deduction rules.

What This Means for You:

• Immediate Action: Fund SEP IRAs by April 15, prepay state taxes (capped at $10k), or make charitable donations via donor-advised funds to lock in deductions.
• Financial Risks: Disallowed deductions triggering IRS penalties (20% accuracy-related); overreliance on state tax prepayments if subject to SALT cap.
• Costs Involved: Documentation tools (receipt scanners $50–$200/year); tax pro fees ($150–$400/hour for complex filings).
• Long-Term Strategy: Bunching deductions in alternating years (e.g., two years’ charitable gifts in one year) to surpass standard deduction thresholds ($13,850 single/$27,700 married in 2023).

Explained: Last-Minute Tax Write-Offs To Consider

A tax write-off (deduction) under 26 U.S. Code § 162 permits taxpayers to subtract eligible expenses from gross income, reducing federal taxable income. The IRS distinguishes between “above-the-line” deductions (adjustments to income, e.g., student loan interest) and itemized deductions (e.g., mortgage interest). Federal law preempts most state regimes, but exceptions exist—e.g., New York requires addbacks for certain federal pass-through entity tax (PTET) deductions.

States like California conform selectively to federal tax code changes. For instance, California adheres to TCJA’s $10k SALT cap but disallows federal bonus depreciation, requiring separate state adjustments (FTB Publication 1001). Conversely, Texas aligns with federal charitable deduction rules but prohibits itemizing if taking the federal standard deduction.

”Last-Minute Tax Write-Offs To Consider” Principles:

The IRS “ordinary and necessary” standard (26 U.S. Code § 162(a)) requires expenses to be typical in the taxpayer’s industry and directly relevant to income generation. Last-minute business deductions require proration for mixed-use assets—e.g., a home office must be exclusively used for business (IRC § 280A), and vehicle deductions need mileage logs distinguishing business/personal use (IRS Rev. Proc. 2019-46). Auditors scrutinize large December transactions lacking clear business purposes.

The TCJA eliminated unreimbursed employee expenses (subject to 2% AGI floor) but retained self-employed deductions. For investors, expenses like investment advisory fees are no longer deductible, though margin interest persists under caps (IRC § 163(d)).

Standard Deduction vs. Itemized Deductions:

Taxpayers must choose between the federal standard deduction ($13,850 single/$27,700 married filing jointly in 2023) or itemizing qualified expenses (mortgage interest, charity, SALT). Bunching strategy is critical—e.g., prepaying two years’ property taxes (where local law allows) or doubling charitable gifts in one year. Seven states—including Alabama and Minnesota—require decoupling from federal itemization decisions, necessitating separate state filings.

High-income taxpayers face phaseouts; itemized medical expenses require exceeding 7.5% of AGI (IRC § 213). California conforms to the 7.5% threshold but disallows deduction of elective procedures (FTB Pub. 502).

Types of Categories for Individuals:

Above-the-line: HSA contributions (2023: $3,850 individual/$7,750 family) via Form 8889; self-employed health insurance (100% deductible); educator expenses ($300/year per IRS Pub. 17). Itemized: Qualified charitable distributions (QCDs) from IRAs (post-70½, up to $100k/year); mortgage points (amortized or fully deducted if for primary residence purchase); casualty losses (federally restricted to federally declared disasters post-TCJA).

State variations apply: Minnesota allows a K-12 education credit (up to 75% of $1,000 expenses) distinct from federal rules; Texas requires sales tax receipts for deduction claims.

Key Business and Small Business Provisions:

Pass-through entities (PTEs) may deduct state taxes at entity level via PTET elections (IRC § 164(b)(6)), avoiding SALT cap—adopted in 36 states but deadlines vary (e.g., New York: March 15; California: June 15). Section 179 expensing permits immediate deduction of equipment up to $1.16M (2023) with phaseouts above $2.89M purchases. Bonus depreciation dropped to 80% in 2023 (TCJA sunsetting).

Home office deductions require Form 8829 documenting exclusive use and principal place of business. Audit risks rise if depreciation is claimed—recapture rules apply upon sale. Startups may deduct up to $5,000 in organizational costs under IRC § 248.

Record-Keeping and Substantiation Requirements:

Federal law (IRC § 6001) mandates receipts, logs, or bank statements for deductions >$75; digital records must be retrievable (Rev. Proc. 97-22). Vehicles require odometer logs (IRS Pub. 463). Retention: three years post-filing, seven years for depreciation claims. States like Illinois enforce longer periods—four years—for contested returns. Penalties: Disallowance plus 20% accuracy penalty under IRC § 6662 for negligence.

Audit Process:

IRS selects returns via Discriminant Inventory Function (DIF) scoring—high-risk triggers include home office or disproportionate charity deductions. Audits commence via mail (CP2000) or field review. Taxpayers have 30 days to respond; mounting defense requires contemporaneous records (Temp. Treas. Reg. § 1.274-5T). State auditors often mirror federal findings—e.g., California’s Compliance Initiatives Program targets mismatched federal/state itemization.

Choosing a Tax Professional:

Specialized preparers—Enrolled Agents (EA) or CPAs with IRS Annual Filing Season Program participation—must audit-proof late-year deductions. Verify credentials via IRS PTIN directory and state boards (e.g., California CTEC). Preparer penalties under IRC § 6694(a) apply for unsupported positions—demand checklists for home office, vehicle, or charitable proof.

Laws and Regulations Relating To Last-Minute Tax Write-Offs To Consider:

Federal: TCJA (Pub.L. 115–97) suspended miscellaneous deductions (§ 67), capped SALT (§ 164(b)(6)), and doubled estate tax exemptions. SECURE Act 2.0 amended retirement catch-ups. IRS Publications 535 (business expenses), 529 (miscellaneous), and 526 (charity) detail substantiation. State: California conformity bill AB 91 retains business interest limits; New York S.B. 6615 decouples from bonus depreciation. PTET registration deadlines vary (e.g., Georgia: January 31).

Case law: Smith v. Commissioner (2020) denied home office deductions for failure to prove exclusive use; Greenwald v. Franchise Tax Board (2022) upheld California’s PTET rules.

People Also Ask:

Can I deduct stock donations made on December 31?
Yes, if shares are held >1 year, FMV at donation date is deductible (up to 30% AGI). Broker transfer dates govern eligibility—in-transit gifts require written confirmation per IRS Pub. 526. Avoid donating depreciated stock (sell first, deduct loss + donate cash).

Are home office upgrades deductible?
Only direct expenses (e.g., painting the office) qualify—not entire home repairs (IRS Topic No. 509). Depreciation recapture applies upon sale if the office is used.

Can I write off medical expenses paid by credit card?
Yes, if paid before December 31—deductible when charged, not when paid (Rev. Rul. 78-38). State rules differ (e.g., Pennsylvania excludes elective procedures).

Do prepaid business supplies count?
Only if used within 12 months (IRC § 162(a)); otherwise, capitalize under § 263. Receipts must show purchase date and business purpose.

Can solopreneurs deduct health insurance?
Yes—100% as adjustment to income (if net profit covers premiums) via Schedule 1. Not available for S-corp owners with >2% ownership who must use payroll deductions.

Extra Information:

• IRS Publication 17: Rules for individual deductions, including educator expenses and HSAs.
• California Franchise Tax Board: State-specific itemization rules and PTET guidance.
• TaxAct Deduction Guide: Interactive tool for last-minute federal/state deduction eligibility.

Expert Opinion:

Prioritizing time-sensitive deductions requires balancing federal limitations, state conformity traps, and documentation rigor. Failing to act before December 31 forfeits permanent savings; equally, aggressive claims without substantiation invite disproportionate penalties. Taxpayers must align strategies with their filing status, entity structure, and audit risk tolerance.

Key Terms:

• Last-minute IRA contribution deadlines 2023
• SALT cap workaround pass-through entities
• Home office deduction exclusive use test IRS
• Section 179 expensing limits 2023
• State tax reciprocity for itemized deductions
• Charitable stock donation FMV deduction
• Record retention requirements IRS audits

*featured image sourced by Pixabay.com