IRS Taxes: Deduct This, Not That
Here's how to avoid an audit this year.
April 6, 2013— -- Every tax-filing season, the great quest by filers is to find the most tax deductions. But there are some deductions you should steer clear of.
If you claim these wrong write-offs, you'll deduct expenses that don't meet Internal Revenue Service guidelines.
And that means you'll end up spending time with a tax auditor and paying more in taxes, penalties and interest.
Bankrate doesn't want that to happen to you, so we've put together this list of expenses you might be tempted to claim. Don't you dare!
But don't get too upset. We've also provided some related tax breaks that do pass IRS muster and will lower your tax bill.
Read more: Don't You Dare Deduct These Expenses
The hazard policy you bought to cover damage from fires, tornadoes, hurricanes, winter storms and other disasters, as well as for more-routine mishaps, offers peace of mind. What it doesn't provide is a tax deduction for the insurance premiums.
But if you meet some tax law guidelines, you can deduct private mortgage insurance, or PMI, on your 2012 tax return. PMI is the insurance your lender requires you to buy if you don't put down a big enough down payment. PMI premiums are deductible as an itemized expense (it goes on Schedule A with your mortgage interest claim) as long as the mortgage insurance policy was issued in 2007 or later. This tax deduction is in effect through 2013.
You also must meet income requirements. If your adjusted gross income is $100,000 or less (or $50,000 and you're married and filing separately), your full PMI premium amount is deductible. If you make between $100,001 and $109,000, the amount of PMI that you can deduct is reduced. And if your income is more than $109,000 ($54,500 married filing separately), you can't deduct PMI at all.
You can figure your allowable PMI deduction using the work sheet in the Schedule A instructions.
Don't deduct a telephone landline, but ...
You can't deduct the cost of your main home telephone landline, even if you primarily use that phone for your business. The IRS says that the first hard-wired phone line in your home is considered a nondeductible personal expense.
But you can deduct as a business expense the cost of business-related long-distance charges on that phone.
If you are an employee, they would be claimed as an unreimbursed business expense on Schedule A.
If you are self-employed, you would count the phone calls as an expense on your Schedule C or C-EZ.
And if you install a second telephone landline specifically for your business, its full cost is deductible.
Don't deduct commuting costs, but ...
The cost of getting to and from your workplace is never deductible. Taking public transportation or driving to work is a personal expense, regardless of how far your home is from your office.
And no, you can't deduct commuting expenses even if you work during the commute.
But you might be able to deduct some commuting costs if you work at two places in one day, whether or not for the same employer. In this case, you can deduct the expense of getting from one workplace to the other.
You also can deduct some expenses related to other work-related travel, such as visits to clients (current and potential) and out-of-office business meetings.
If you're self-employed, these expenses would go on your Schedule C or C-EZ.
If you're an employee, travel costs must be claimed as unreimbursed business expenses. As such, your business and other miscellaneous itemized expenses must exceed 2 percent of your adjusted gross income.
Whatever your business travel situation, be sure to keep good records.
You also could encourage your employer to establish a commuter savings account program. This employee transportation fringe benefit lets workers use pretax dollars to purchase mass-transit passes and pay for parking near work.
Don't deduct your pet, but ...
Yes, your dog or cat is a family member. And yes, some insurance companies now include coverage for Fido or Fluffy in auto policies.
But your affection for your pet or an insurer's willingness to pay for some of your domesticated animal's care doesn't carry any weight with the IRS. So don't dare try claiming your pet as a dependent. Yes, it has been done. And yes, it is disallowed by the IRS when the furry facts are revealed.
You can, however, deduct as itemized medical expenses the costs of buying, training and maintaining a guide dog or other service animal to assist a visually impaired or hearing-impaired person, or a person with other physical disabilities.
Don't deduct Social Security taxes, but ...
You lose a lot of income each payday to Federal Insurance Contributions Act, or FICA, taxes, the money withheld from your checks to pay for your future Social Security benefits. The debate as to whether Social Security will be around when you retire is still raging. But one thing is sure: Don't even think about trying to deduct these taxes.
But if you overpaid this tax, you can get a credit for your Social Security overwithholding. There is a limit on how much FICA taxes can be contributed each year. The tax is withheld on up to the Social Security earnings base, which is adjusted annually for inflation, and which for 2012 is $110,100 and for 2013 is $113,700.
If you had multiple jobs and your combined earnings exceeded the wage base, you probably had too much FICA withheld. You can claim the excess Social Security tax as a credit when you file your tax return.
Don't deduct plastic surgery, but ...
If you simply are following your inner Joan Rivers, the IRS definitely won't let you deduct the costs of your nips and tucks.
The IRS specifically says you generally cannot include in deductible medical expenses the amount you pay for procedures such as face lifts, hair transplants, hair removal (electrolysis) and liposuction.
But if a surgery is medically prescribed, for instance, a nose job to treat respiratory issues, and you just happen to like the look of your new sniffer, then that's OK. The doctor's decision makes it a medical deduction.
The IRS says: "You can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma or a disfiguring disease."
Remember, all your medical expenses, including any allowable plastic surgeries, must come to more than 7.5 percent of your adjusted gross income on your 2012 Schedule A before you can claim them. For the 2013 tax year, the medical deduction threshold is 10 percent of your AGI.
Don't deduct dry cleaning, but ...
Looking sharp at work rests totally on your shoulders. A recent U.S. Tax Court ruling reaffirmed this tax law when the judge disallowed a television anchorwoman's deductions for tens of thousands of dollars in clothing she bought to wear on air.
But you can deduct the cost of dry cleaning or laundry of business uniforms. Under the tax code, that means attire you can't wear anywhere else, although with the ways some folks dress today, that designation could be hard to nail down.
When an outfit is "not suitable for everyday use," the IRS says the costs of upkeep for the apparel can be claimed as an unreimbursed business expense on Schedule A.
Also deductible are the cleaning charges for nonprofit uniforms, for example, an outfit required of hospital volunteers or Boy Scout or Girl Scout troop leaders. Here the costs of the uniform and its maintenance would count as charitable deductions, also claimed on Schedule A.
Don't deduct volunteer time, but ...
Your time is valuable, but that doesn't matter to the IRS when it comes to volunteering at a charity.
You can't claim the value of your wages for the hours spent helping out at your favorite nonprofit. Neither can you count as a deduction the value of a project you created, such as a poster that you, a graphic artist, designed for the charity.
But you can deduct other costs associated with your charity work. This includes your mileage in connection with the group's work, which can be claimed on Schedule A at the rate of 14 cents per mile.
You also can claim as a charitable deduction unreimbursed out-of-pocket expenses.
As with all things tax, keep good records. Track your charitable travel and hang on to the receipts for the poster board and special markers you bought just for the nonprofit's poster project.
Don't deduct OTC medication, but ...
Headache and cold treatments from your neighborhood pharmacy shelves have never been tax-deductible. There was some confusion here because for a while, the IRS allowed owners of medical flexible spending accounts, or FSAs, to use money in those pretax accounts to pay for over-the-counter drugs.
That option ended when 2011 began. Now you must get a doctor's prescription for OTC medications before the purchase can be reimbursed with FSA funds.
But you still can deduct diagnostic tests, such as store-bought tests for pregnancy and diabetic blood sugar levels.
And the IRS says moms get a tax deduction on breast-feeding supplies, including pumps and bottles, because, like obstetric care, "they are for the purpose of affecting a structure or function of the body of the lactating woman."
Don't deduct overnight camp, but ...
When school lets out for the summer, working parents face a child care dilemma: what to do with the youngsters while Mom and Dad are at the office.
Some families send the kids off to summer camp. That's a great experience for the kiddos and eases, at least temporarily, parental child care concerns.
But sleep-away camps, in the summer or any other time of the year, are not tax deductible.
However, if you decide instead to keep the kids at home and simply send them to day camp during the hours you're working, that expense could qualify as a claim for the child and dependent care credit.
If your care costs are for one child, you can count up to $3,000 of care expenses each year toward the credit. The expense amount is doubled for the cost of caring for two or more dependents.
Your actual tax credit can be up to 35 percent of your qualifying expenses, depending upon your income. And while that might not seem like a large percentage, remember that since it's a credit, you get to use it to offset your tax bill dollar for dollar.