Tax Calculation & Business Write-Offs Explained:
This info-graphic shows the personal tax calculation. Examining it can help your understanding of the individual tax calculations and various tax write-offs. Itemized deductions are often misunderstood, as they are only deducted in the event the total amount of all itemized deductions is greater than the standard deduction. Itemized deductions include charitable contributions, mortgage interest, property taxes, unreimbursed employee job expenses and certain investment expenses.
The graphic also shows how both employees and self-employed business owners can have the same businesses expenses, but that they are deducted differently. The graphic shows how common business expenses are calculated, including the home office, meals and entertainment, vehicle usage or mileage and travel. Sole Proprietors or Independent Contractors, which are both self-employed, deduct their business expenses from business income on Schedule C, with the Net Profit (or Loss) flowing to the Income section in the personal tax Form 1040. For employees, unreimbursed job expenses are only deducted as an itemized deduction, which is first limited by 2% of Adjusted Gross Income, or AGI that is seen as a subtotal in the calculation.
Sometimes, when using DIY accounting software, people will notice that they enter itemized deductions, including their unreimbursed job expenses or charitable deductions and they do not notice a change in their tax due or refund due. This is because of how they are calculated. While self-employed businesses will always get a benefit from writing off their expenses, employees may not get any benefit and even when they do, it is limited.
Compare The Info-graphic To The Form 1040:
You can click the Form 1040 to be brought to the IRS website where the form is posted as a PDF.