February 10, 2013
You'd Be Surprised at What's Tax Deductible
By RACHEL LOUISE ENSIGN
What's a more valuable tax deduction, a deadbeat boyfriend or a vicious guard dog? It depends on how big a deadbeat the boyfriend is.
No, this isn't a bad joke.
It's among the things taxpayers ask each year as they try to squeeze out whatever deductions they can.
And tax experts say they've heard it all.
Among the zaniest: How do I value a taxidermy I donated to charity? (It can involve estimating stuffing and mounting costs.) I'm putting a swimming pool in this year, I'm going to use it for exercise, can I deduct it as a medical expense? (Likely not.) What if my neighbor gives me a cow in exchange for help building a barn? (You must report the fair market value of that cow as ordinary income.)
Some people "are very creative and want to see if they can outsmart the tax code," says S. Miguel Reyna, a certified public accountant in Dallas.
Of course, many of the queries aren't so offbeat. Here's a sampling of questions that tax experts are often asked.
1. Can I deduct my pet?
Fido may feel like your child, but that doesn't mean he'll land you a tax break.
That said, there are rare circumstances where a pet may qualify for a tax deduction if you itemize. If your pet is a service animal for a disability that you have, the cost of buying, training and maintaining the animal may qualify as a medical expense. This typically includes vet visits, grooming and food, according to the Internal Revenue Service.
A big caveat: You can only deduct medical expenses that exceed 7.5% of your adjusted gross income in 2012. (The threshold is 10% for 2013 for most people).
What's more, you may be able to deduct costs related to a guard dog employed by your business for protection, depending on the circumstances, according to G. Scott Haislet, a CPA and tax attorney in Lafayette, Calif.
2. Can I claim my girlfriend or boyfriend as a dependent?
"Boy, that one comes up so often," Bob Meighan, vice president at Intuit's TurboTax, says of this question. "The answer is yes, in some cases."
Claiming a dependent reduces your taxable income. Dependents can be family members and individuals who aren't family members, but meet criteria.
To claim a nonrelative as a dependent, he or she had to live in your home for the full tax year and make less than $3,800 in gross income during that time. You also generally must provide more than half of the person's financial support, and he or she can't be claimed as a dependent by anyone else, among other criteria, says Mr. Meighan.
3. l left a bag of clothes at Goodwill. What's stopping me from saying it's worth $10,000 and deducting that amount?
If you itemize your deductions, you may be able take the charitable deduction for donating clothes that are in good condition to thrift shops. But gauging the value of that out-of-style blouse requires help, especially since some charities leave it up to you to determine how much you've given.
The Salvation Army has a guide to help calculate the value of clothing, furniture and household goods at satruck.org/donation-value-guide. TurboTax also offers free estimates at ItsDeductible.com.
What's stopping you from writing off more than the true value? The IRS has documentation rules for these kinds of donations that vary depending on their value. If an item or group of similar items donated is worth more than $5,000, you typically have to obtain, among other things, a qualified written appraisal of the item or items donated.
4. My doctor said that I need to lose weight. Can I deduct my gym membership?
In theory, some weight-loss-related expenses are deductible. In practice, deducting them is tough, say tax experts.
You only qualify if you need to lose weight because of a specific, doctor-diagnosed disease, says Gil Charney, principal tax research analyst at the Tax Institute at H&R Block .
The only costs that would then qualify as medical expenses would have to be specific to your weight-loss regimen. So a so-called general-use item, such as a gym membership, wouldn't pass muster, but a specific weight-loss program would, he says.
Again, you can only deduct medical expenses once they exceed 7.5% of your adjusted gross income for 2012.
5. I bought a tricked-out new computer, which I partially use for my studies. Is it covered under education tax breaks?
The Lifetime Learning Credit and American Opportunity Tax Credit allow students and parents to subtract a certain percentage of educational expenses from their tax bill. But whether a computer qualifies depends on where you go to school.
You can put a laptop's cost toward these credits only if the device is formally required by a school or degree program, says Mr. Charney. You'll want a receipt for the purchase and documentation of the school's requirement.
The Lifetime Learning Credit is a credit of as much as $2,000 for qualifying educational expenses, available to joint filers with less than $122,000 in modified adjusted gross income and single filers with less than $61,000. The American Opportunity Tax Credit is a credit of as much as $2,500 per student and has a slightly higher income threshold: $180,000 for joint filers and $90,000 for single filers. You usually can't claim both.