Accounting On Us
Two truths and a lie
What can you really deduct?
Donna H. Laubscher, CPA
What can you really get away with, or deduct, when it comes to your taxes? It’s a popular question. Sometimes it seems we tax professionals get these types of questions because “my neighbor’s sister-in-law’s cousin who lives three states over said this is a tax deduction, and she has been deducting it on her tax return for years. So why don’t I get to take it?”
Lie: I can deduct all expenses related to caring for Fluffy or Fido – pet food, vet visits, etc.
Truth: If you have a service animal, the cost of the expenses and upkeep is indeed a deductible medical expense (subject to the medical expenses limitation – 10% of your adjusted gross income (AGI). By the way, the 7.5% limitation is gone for all in 2017 and beyond).
Truth: You can make a donation to an animal related charity, which makes your donation a charitable deduction. If you donate more than $250 in cash, you’ll need a receipt from the charity.
I know this article is called two truths and a lie, but deducting pet expenses actually has THREE truths.
Truth: If you put your animal to work, you can deduct job related expenses. Wait, wait – how do I put my animal to work? Well, maybe your dog is protecting your inventory at work, or a guard dog. Suggestion, however, on the guard dog – it may be more believable if the guard dog is a German Shepherd, as opposed to say, a Dachshund, even a loud barking Dachshund.
We get questions about this A LOT.
Lie: I can deduct my gas expenses for driving to work every day.
Sorry to burst your bubble, but your daily commuting expenses are NOT deductible. Yes, we know you are driving to work and that in theory it seems like it is a business expense. But tax theory and tax reality are different, so no deduction.
Truth: You can deduct travel expenses if your home is your principal place of business. For example, a pharmaceutical rep who has to travel from her home office to medical offices to meet with doctors and get orders fulfilled. You do not have to claim the home office deduction to qualify; however, you do have to establish your home as your principal place of business.
Truth: You can deduct your commuting costs if you have to travel temporarily for your job outside your normal work and living area. This is an exception if it is not reasonable for the employee to move permanently for a job that is only temporary.
Lie: I can write off updating the landscaping in my yard.
Modified lie: If you’re doing landscape improvements, it can add to the basis of your primary residence and potentially reduce the gain when you sell your house.
Truth: If you have a rental property, the landscaping costs, maintenance and upkeep are deductible. Depending upon the nature of the item, they are either deductible in the current year, such as the payment for weekly maintenance, or as depreciation, in the case of updating your stone retaining wall.
Truth: If you have a home office, then potentially a pro rata portion of landscape upkeep can be deductible. This is a numerator/denominator type of calculation. Consult your professional tax advisor to see if you qualify.
Lie: I can deduct the $1,000 I pay in rent every month for my apartment.
Rent is not deductible when it’s where you’re living.
Truth: If you have a home office where you’re renting, then the business portion of your rent might be deductible. There are a couple of different methods to determine home office deductibility – a simplified method and the regular old-fashioned way. Again, seek the advice of a professional to determine which has the best tax consequences for your specific situation. (Don’t check with the neighbor’s sister-in-law’s cousin – they may not be familiar with your tax situation.)
Truth: Rent is deductible as an ordinary and necessary business expense if you’re renting office space or retail space. If you own and operate a restaurant and need to pay the landlord, that is a business expense.
All of my charitable contributions are deductible.
This one isn’t two truths and a lie, but it does have two caveats and a clarification.
Caveat: Assuming that your contribution is to a qualified charity, it is deductible.
Caveat: If your contribution to the charity exceeds $250 during the year, you must have a receipt from the charity that shows you did not receive anything in return for your charitable contributions. You must have these receipts in hand before filing your tax return.
Clarification: In order to get the deduction for charitable contributions, you have to itemize your deductions.
Lie: I can deduct EVERYTHING related to my health and medical care.
You cannot deduct over the counter medications such as vitamins or a gym membership.
Truth: You can deduct doctor appointments, health insurance, dentist appointments and prescription drugs – all subject to the medical expense limitations mentioned previously in this article.
Truth: You can deduct over the counter medical equipment. Examples of this are crutches or blood sugar testing kits.
Just like with charitable contributions, you have to itemize your deductions to qualify.
Lie: The government will pay me to save for retirement.
They’re not going to send you a check to put into your retirement account. Though, you can opt to have your IRS refund deposited into your IRA account.
Truth: If you contribute to your company’s 401(k), it’s a reduction of your taxable wages. It’s the same if you contribute to an IRA and use the contributions to reduce your taxable income.
Truth: For low income and lower middle income taxpayers, there is the Saver’s Credit, which is a direct credit against your taxes. The amount of this credit is reduced as your AGI increases.
Of course all of this could change, if some of President Trump’s tax proposals do become law – i.e. getting rid of all deductions except for the home mortgage interest deduction and the charitable contributions deduction. Since there were not many details in the proposal, we don’t really know what might change. So, for now, we do what we always do – we plan and strategize with the tools that we have available to us at any given point in time. And I am sure the neighbor’s sister-in-law’s cousin is indeed a qualified tax professional.
Donna H. Laubscher, CPA, Partner, specializes in tax, accounting and consulting services for individuals and businesses. She can be reached at (480) 483-1170 or DonnaH@hhcpa.com.