So you think you’ve got a creative way to save money on your taxes…
You might want to stop right there, because creativity and tax returns can be a dangerous mixture. Based on the experiences of some tax and financial professionals, here are five examples of questionable tax deductions:
- Time isn’t always money. If you invest in improvements to a rental property, the cost of those improvements can increase the cost basis of that property. However, if you do the work yourself, don’t try to include the cost of your time in the increase to basis. In the eyes of the IRS, it only counts if you paid a professional to do it.
- A vast entertainment empire. A musician believed he could deduct the rent on all three rooms of his apartment – his kitchen, because that’s where he discussed gigs over the phone, his living room, because that’s where he practiced, and his bedroom, because that’s where he kept his saxophone. On a percentage basis though, these were trivial in comparison to the primary uses of these rooms.
- Trout fishing. People say that fishing can be therapeutic, but that doesn’t mean it qualifies as a medical expense. Neither do the associated travel, food, beverage, or lodging expenses.
- Sex toys. Perhaps there was a physical problem being addressed. Or perhaps this person needed a mental health break and didn’t like trout fishing. Either way, unless they were prescribed by a physician, sex toys are unlikely to qualify as a medical expense.
- Opportunity cost. The owner of a vacation property tried to write off the lost rent from a cancelled reservation as a bad debt. Money you could have earned but didn’t doesn’t carry the same weight as money you had and lost.
What’s the harm in trying?
Sure, the IRS might disallow your deduction, but what’s the harm in trying? Well, if your creative deduction is deemed to constitute tax evasion, it could cost you a fine of up to $250,000 as well as possible prison time. And though you’ll have gambled and lost, that’s not tax-deductible either.
11 Responses to “You Deducted WHAT? Five Off-the-Wall Tax Deductions”
BG, regarding mortgage interest, the limit is the interest on the first million of mortgage debt. Unless someone has a mortgage with 100% APR, they aren’t going to pay a million in interest.
In response to the article, item #5, many people try to deduct bad debt even though they do not report on an accrual basis. The reason some businesses are allowed to deduct bad debts is that they reported the sale as income at the time it was made. If they never actually receive the money for the sale, they have paid income tax on money they never received. Thus, they are allowed to deduct it to get back to square zero. If you’re reporting on a cash basis, then there is never a deduction for bad debts.
Ta ta for now.
I am with Justin – the fair tax system is long overdue. It seems like an unlikely possibility, but something I am still dreaming about for the future!
#5 Doc) “Dr.Joseph Mortimer Granville patented the first electromechanical vibrator, there were at least two dozen models available to the medical profession.”
If people can deduct acupuncture, then I’m sure they can deduct these ‘toys’ with no problem — just don’t call them a ‘toy’ to the IRS Auditor, called them a ‘medical device for the treatment of female ailments’.
Nickel) You are right, most states limit the deduction. New Mexico, South Carolina, and West Virginia allow the full contributions to be deducted — so, that line only applies to those handful of states.
From a federal POV: all those contributions grow tax-free (no deduction on contributions) — much like a Roth. But you know that already.
Ace) The boat can be financed within the mortgage (rolled-in) — so even if it isn’t a houseboat, your can still get away deducting the interest for non-home items. People do this with cars, credit-cards, and other things too.
BG: I’m not aware of any states that allow you to deduct your entire 529 contribution. In most cases, they cap it a few thousand (if they offer a deduction at all). Am I missing something?
Justin) You are thinking backwards — they are getting the boat, and the taxpayers (us) are covering $2,000 of their interest payments.
They have figured out how to rob the treasury.
I have never been asked to prescribe a sex toy for a tax deduction.
come to think of it, I’ve never been asked to prescribe a sex toy for any reason….
Justin – Unless your parents have purchased a houseboat that is their primary residence, I’m curious to know how they would deduct interest on a boat.
I personally think we need to switch to the Fair Tax system, but that’ll never pass because the IRS would be useless at that point…
So instead I choose to laugh when people like my parents buy bigger toys to get the tax deduction. I explain 50 times that it doesn’t make sense to pay $5,000 in interest on a boat just to save $2,000 on taxes, but for some reason it doesn’t sink in….
I’d like to point out that tax evasion is rarely prosecuted. You’d have to get to Wesley Snipes levels of tax evasion where you’re brazenly defying the tax code and giving public statements that taxes are unconstitutional.
More likely, is the IRS will deny outlandish deductions and if you try to press your luck too hard, they’ll audit you.
DISCLAIMER: This is not tax advice!!
Here are some off-the wall _allowed_ deductions:
* $8,000 credit for buying a home in 2009-2010
* $33,000 deduction by maxing 401ks (for a couple)
* deduct any medical expenses that are over 7.5% AGI — expenses include nose-jobs, boob-jobs, and other plastic surgery too
* self employed? deduct $165,000 by investing in a solo defined benefit (DB) plan
* state taxes: deduct $26,000 per dependent, per year (for couples) by stashing money into a 529. If you have three kids, that’s a $78,000 deduction. Want to do it all in one year: stash $390,000 per child at once (can only do this every 5 years though).
* sell your main home for a $500,000 profit? no problem: its tax free.
* paying $1 million in mortgage interest? deduct it all
* only ‘poor’ people have incomes. Be like Steve Jobs and get your $46 million a year in the form of dividends: you will pay no social security taxes, no medicare taxes, no income taxes — just pay a flat 15%.
If a huge corporation like GE (who had $14.2 billion in profits), can get away with paying no taxes — then so can you. You just aren’t trying hard enough.