7 Tax Deductions That Set Off Alarms
Seven silly tax loopholes that may be legitimate.
April 16, 2012 — -- intro: With only one day before the Internal Revenue Service's April 17 deadline, here's a look at a range of common and uncommon tax loopholes that, depending on your career, border on gray to you, but to auditors can come across as flashing red lights.
quicklist:title: Guard Dogstext:
"Every year someone asks me about guard dogs," Philadelphia tax attorney Kelly Phillips Erb said.
If the dogs are certified guard dogs for your business, they may be deductible. Erb said they can't be "junkyard dogs" to be deductible. Erb's family dog is a mix between a Boxer and Labrador, and while intimidating, Erb's pet would not deductible.
Sophie, the Boston Terrier that Erb's office manager brings to work would not count either.
"Sophie doesn't scare anyone," she added.
Similarly, private jets that are purchased for security reasons could be deductible for corporations, and not just if they offer convenience or comfort, Erb said.
quicklist:title: Gambling text:
Casual gamblers may not realize they can deduct their gambling losses as professional gamblers do. They can, but there are some things to note, said Erb. First, you may deduct gambling losses only if you itemize deductions, which Erb said is only a third of tax filers.
Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos, cash winnings and the fair market value of prizes like cars and trips.
Second, the amount of losses you deduct can't exceed the amount of gambling income reported on your return.
As a professional, if you have a gambling loss that exceeds your winnings, you cannot deduct the loss. Your tax loss from the business of gambling can exceed your gambling income but not your gambling loss.
"If it's your real job and you lose money, then you can deduct those losses," she said. "But if you're just a casual gambler, you're out of luck if you always lose."
In a note to casual gamblers, the IRS explains that casual gamblers must have receipts for their losses on gambling.
quicklist:title: Home Office Coststext:
In August, a U.S. Tax Court judge ruled in favor of the IRS who said a Florida taxpayer was not entitled to a deduction for the use of his bathroom as a home office expense.
"You could find a million things for home offices that people can wrongly think they can deduct," Erb said. But unless your home office is your primary place of business, auditors will take note if you deduct for related costs.
In the Florida taxpayer's case with the bathroom, the judge ruled that because the man's children's and personal guests used the bathroom, it wasn't used exclusively for his accounting business.
Erb told one of her clients, an artist, that storing a large work of installment art in a living room does not a home office make.
Many people treat their kitchen table or living room as your home office or home office storage area, but it's often not a primary place of work.
"If you choose to work from home because you want to, that doesn't create a home office," Erb said.
Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and ABC News personal finance columnist, said he once had a client who was a professional wrestler who tried to deduct formal clothing he wore for interviews or other public appearances. His reasoning was that he would never wear suits unless for work.
"I told him, 'if you have a wrestling uniform, that's an expense,' but clothing is not."