4 Surprising Tax Deductions the IRS Allowed
Paying taxes is simple in concept, but complicated by nature. This is especially true when it comes to taking tax deductions or otherwise reducing your tax liability.
If you listen to your friends or social media, you might get the feeling you’re constantly overpaying what you owe. While in some cases this might be true, if you follow every random bit of advice you hear, you might end up taking some deductions that are disallowed, or even illegal. So how do you keep it all straight?
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Start With Clear, Legal Deductions
The IRS is the best source of legal deductions. One of the easiest and most popular ways to reduce your taxable income is by contributing to a 401(k) or IRA. A health savings account (HSA), if you have a high-deductible health plan, is another good way to reduce your taxable income while covering medical costs tax-free.
The IRS credits and deductions page lists dozens of options most filers never check, from education credits to the Earned Income Tax Credit (EITC). If you’re unfamiliar with these credits, consider working with a CPA or other tax expert so that you can get all of the credits to which you are entitled.
The Difference Between Smart and Illegal
There’s a big difference between tax avoidance and tax evasion. Tax avoidance is the perfectly legal process of arranging your finances to owe less. Tax evasion, on the other hand, is willfully disobeying the law to hide income or falsify a tax return.
In other words, tax avoidance can lower your tax bill, while tax evasion can get you a prison sentence (or at least a substantial fine). But that doesn’t mean that all legal deductions are obvious.
4 Unusual Deductions the IRS Approved
Some tax deductions seem absurd on the surface, but actually end up victorious in tax court. These aren’t loopholes in the traditional sense. In fact, they should by all accounts be considered edge cases that may be hard or even impossible to recreate. Regardless, they’re real examples of deductions that the IRS ultimately accepted.
In South Carolina, a couple ran a junkyard overrun with snakes and rats. Their plan was to leave out cat food to attract feral cats that would kill those pests. Thinking this was a legitimate business expense, they deducted the cost of the cat food. The IRS balked, but the tax court ultimately agreed it was indeed ordinary and necessary for the business.
Professional bodybuilder Corey Wheir went through gallons of posing oil to make his body and muscles shine during competitions — and he wrote it off as a business expense. He also deducted buffalo meat and special vitamins as necessary for the conduction of his business. The tax court agreed that the oil served his for-profit bodybuilding career, per Wheir v. Commissioner, but denied the other claims.
Clarinet lessons sound like a personal expense, but one parent managed to deduct their child’s lessons as a medical expense. The lessons were prescribed by a medical doctor to help correct the child’s overbite. Although unusual, deductions for specific medical purposes, even when they don’t appear to be medical, can qualify according to IRS Publication 502.
One of the most unusual legal deductions applies to Alaska Native whaling captains. Those who qualify can deduct up to $10,000 in whaling expenses, boats, gear, fuel and food for their crew as charitable contributions, even though no money actually goes to a charity. The concept behind the deduction is that these captains fund and lead subsistence whale hunts that feed their entire communities. The tax code has recognized this deduction for two decades, according to IRS Publication 526.
The Bottom Line
You shouldn’t build your tax strategy around an obscure deduction that may lead to charges of tax evasion. However, you should document all of your legal deductions and use them to the fullest extent of the law.
Keep receipts and a paper trail, especially for any deductions that might be considered unusual. If you feel like you’re pushing things too far, speak with a tax professional to ensure you don’t end up in hot water.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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