How Much of My Investments Can I Write Off Each Year?

There are many ways you can claim investments on your tax return as a way of reducing the tax you owe, but what is allowed and how much of it you can deduct depends on the type of investment.

If you make investments in things such as furniture used for business, you deduct that expense right off the top of your earnings, so that you are not paying an income tax on something that was not a profit. For instance, say you had earnings of $50,000 and you spent $5,000 for office furniture. You can deduct that investment, and only pay income tax on $45,000.

For some other investments, such as buildings or some types of major equipment purchases, you or your accountant might choose to (or be required to) spread the write-off over several years. This is also referred to as “depreciating an asset.” It’s important to check on the current Internal Revenue Service guidelines for such write-offs before you plan on recouping the invested money come tax time.

You can also write off some of your savings investments — usually retirement accounts. There are different types of “tax-sheltered” investments, but basically what happens is that you direct your payroll service to take out a certain amount of money from your paycheck before they tax you on your earnings. You are limited in how much you may save in this way (it varies, depending on the type of account you set up) — usually up to 15 or 25% of your income. In return, you agree to leave the money in the account until you are at a certain age,(or in the case of Government Bonds, until they mature), when you can withdraw them (and most likely, pay a lower income tax as a retired person). If you withdraw the funds before maturity or retirement, you must not only pay the income tax on them, but a hefty penalty, usually 10%.

As the allowable amounts and types of investments that are deductible can change yearly, it’s important to get advice from an accountant or tax attorney.