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.