7 Tax Deductions For W-2 Employees
If you’re formally employed by a US company, chances are you receive a W-2 tax form each year for filing your income taxes. As a W-2 employee, you may also be wondering what tax deductions are available to you to help reduce your federal income tax liability. Tax deductions for W-2 employees range from the sizable standard deduction to smaller tax reliefs like charitable donations and home mortgage interest. Explore 7 W-2 tax deductions to see which tax reliefs you’re eligible for.
Key Takeaways
- W-2 employees are those who are formally employed by a US company or organization and receive a W-2 tax form.
- There are a number of tax deductions that W-2 employees can use to reduce their taxable income.
- The simplest and usually largest deduction is the Standard Deduction.
- Other deductions include itemized deductions, 401(k) plans, and IRA contributions.
Table of Contents
- 7 Tax Write-Offs For W-2 Employees
- Non-Deductible W-2 Employees Expenses
- With FreshBooks, You Can Prepare Your Taxes more Easily
- Frequently Asked Questions
7 Tax Write-Offs For W-2 Employees
Discover some of the biggest deductions including the standard deduction and itemized deductions, then explore smaller tax write-offs to see which can benefit you.
1. Standard Deduction
Almost all W-2 employees are eligible for the standard deduction, which is one of the largest deductions that you can apply to your federal income taxes. For the 2023 tax year, the standard deduction is $13,850 for people filing singly or for married people filing separately. For heads of household, it is $20,800, and for a married couple filing jointly the standard deduction is $27,700. These deduction amounts are adjusted for inflation each year and may be slightly different based on age, disability, and other personal factors. You claim the standard deduction when you file your federal income taxes each year.
2. Rental Property Loss Deduction
If you’re a W-2 worker who owns a rental property that you’ve lost money on, you may be able to claim some of that loss on your income taxes. This loss might be due to unpaid rent by your tenants, or to rent that’s charged below fair market value. In order to qualify for this deduction, your W-2 wage income must be below a certain threshold. The maximum amount that you can claim for this loss in a given tax year is $25,000.
3. 401(k) Plan
Tax-deferred 401(k) plans offer several benefits. First, they allow you to reduce your taxable income in your contribution year. Making a 401(k) contribution reduces your taxable income. Although you will be taxed on the amount you contributed to the 401(k) plan when you start making withdrawals during your retirement, you can create a tax plan and strategize to pay taxes based on a lower tax rate. This enables you to reduce the overall amount of taxes you pay on 401(k) contributions.
4. IRA
If you aren’t covered by a retirement plan with your employer, you’re allowed to claim the full amount of your IRA contributions as a tax deduction. For those who are married, if your spouse is covered by their workplace retirement plan, you can still claim some deductions but the amounts may be reduced. Workers, who are covered by their employers may also be able to claim some IRA tax deductions, but these amounts are limited if your income exceeds a certain amount.
5. Child Tax Credit
Although not a deduction, this credit is important for taxpayers who are parents. There are 7 eligibility criteria in order to claim the child tax credit:
- Age: The child must be under 17 at the end of the tax year
- Relationship: The child must be your son, daughter, or sibling (step, foster, and adoption children also qualify). The child can also be a descendant of one of these people, like your grandchild, nephew, or niece
- Support: The child can’t have provided more than half of their own financial support
- Dependent: You must claim the child as your dependent on your tax return, and they must meet those criteria
- Living Arrangements: The child must live with you for more than half the year
- Citizenship: The child must be a US citizen, national, or resident alien
- The child cannot file a joint tax return with their spouse
6. Home Mortgage Interest
If you’ve taken out a mortgage on your home, you may be eligible to claim some of the interest on that loan as a tax deduction. In order to do so, your mortgage has to be a secured debt that you intend to repay, and you must include home mortgage interest as part of an itemized deduction—meaning you can’t claim this if you choose to claim the standard deduction. The amounts you can claim depend upon the size of your mortgage and when it was incurred.
7. Charitable Donations
In previous years charitable donations were eligible as a tax deduction for everyone, but from 2023, charitable donations can only be claimed as part of the itemized deductions. If you choose to take the standard deduction, you won’t be able to write off any charitable donations.
Looking for more tax filing support? Discover how FreshBooks takes the pain out of tax preparation for helpful tips on filing your income taxes.
Non-Deductible W-2 Employees Expenses
While there are plenty of helpful tax write-offs for W-2 employees, there are some expenses that you can’t claim. These include:
Commuting Expenses
As of 2018, W-2 employees can no longer claim vehicle expenses as an itemized deduction. However, if you use your car for work-related travel, then your employer might reimburse you for the costs.
Political Contributions
If you’ve contributed funds to a political party or other political organization, you’re not eligible to write this off on your taxes. This is because political organizations don’t qualify on the IRS list of Tax-Exempt Organizations, so political contributions are not classified as a charitable donation.
Professional Dues and Memberships
Prior to the Tax Cuts and Job Act of 2017, employees were able to deduct some professional memberships like union dues. This tax write-off was removed in 2017, so W-2 employees are no longer able to deduct any type of professional dues and memberships.
Home Office
While freelancers, small business owners, and other self-employed people can deduct some home office expenses on their taxes, the home office deduction doesn’t extend to W-2 employees. Even if you work hybrid or from home sometimes, you’re not eligible to claim this space as a business expense to reduce your tax bill.
Entertainment and Meal Costs
Entertainment and meal costs aren’t deductible for W-2 employees, even when you’re entertaining business clients.
Personal Expenses
Personal expenses cover a broad range of things from laptops and personal equipment to home wifi and cell phone plans. Unfortunately, even if you work from home and use your home wifi for business, you can’t continue deducting those expenses anymore.
With FreshBooks, You Can Prepare Your Taxes more Easily
If you’re a W-2 employee, there are a number of W-2 tax credits and deductions you can claim to reduce your taxable income. One of the easiest deductions is the Standard Deduction, which almost everyone can claim. It’s a fixed amount based on age and filing status, so you can reduce your taxes. You can also explore 401(k) contributions, itemized deductions like home mortgage interest deductions, and other tax breaks.
FreshBooks accounting software helps you keep track of all your expenses so you can make the most of your tax relief claims. You can categorize expenses and find tax support to make tax season easier than ever. Try FreshBooks free to discover easy personal and business accounting today.
If you own a business and are looking for tips on tax filing, explore Small Business Tax Deductions for helpful tips on eligibility and how to claim your tax reliefs.
FAQs About Tax Deductions For W-2 Employees
Learn even more about W-2 employee tax deductions with frequently asked questions on what is deductible and what isn’t.
How can a W-2 employee reduce taxes?
The easiest way for a W-2 employee to reduce their taxes is to claim tax write-offs. The simplest write-off is the standard deduction, which is also often the largest deduction. If you have a lot of medical expenses, you might also want to consider claiming itemized deductions instead.
Can a W-2 employee write off a vehicle?
W-2 employees can no longer write off vehicle-commuting expenses on their itemized deductions. You may be able to receive a mileage reimbursement if your employer offers that, though it’s not required by the IRS. FreshBooks mileage tracker app lets you track your mileage so you can easily submit your employee expense reports.
Can a W-2 employee deduct unreimbursed employee expenses?
Most unreimbursed employee expenses can’t be claimed by W-2 employees on their federal income taxes. Ask your employer if they would reimburse you for those expenses because those expenses are usually deductible to them.
What can I deduct if I work remotely?
While you can’t deduct your home office or meals, you can still claim the standard deduction as a tax write-off. You can also take advantage of deductions like IRA and 401(k) to reduce your taxable income, as well as charitable donations and home mortgage interest if you decide to itemize your deductions.
Should mileage reimbursement be included on W-2?
Mileage reimbursement might be included in your total wages in your W-2 form, but it will not be taxable to you, and you cannot claim a mileage deduction on your personal tax return.
Can you claim your internet bill on taxes?
Your internet bill usually qualifies as a personal expense, so you can’t claim this on your taxes. This changes if you’re self-employed and using your internet for business, but if you’re a W-2 employee, you can’t claim internet even if you work remotely.
More Useful Resources
Explore our diverse tax deduction guides catering to various niches. From small businesses to real estate agents, find valuable insights to optimize your tax savings.
About the author
Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.
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