Surprising Deductions

AIRPLANERather than drive five to seven hours to check on their rental condo or be tied to the only daily commercial flight available, a couple bought their own plane. The Tax Court allowed them to deduct their condo-related trips on the aircraft, including the cost of fuel and depreciation for the portion of time used for business-related purposes, even though these costs increased their overall rental loss on the condo.

Babysitting Fees
BABYSITTING FEESFees paid to a sitter to enable a parent to get out of the house and do volunteer work for a charity are deductible as charitable contributions even though the money didn’t go directly to the charity, according to the Tax Court. The court expressly rejected a contrary IRS revenue ruling.

Body Oil
BODY OILA pro bodybuilder used body oil to make his muscles glisten in the lights during his competitions. The Tax Court ruled that he could deduct the cost of the oil as a business expense. Lest it be seen as a softie, though, the court nixed deductions for buffalo meat and special vitamin supplements to enhance strength and muscle development.

Breast Augmentation
BREAST AUGMENTATIONIn an effort to get bigger tips, an exotic dancer with the stage name “Chesty Love” decided to get implants to make her a size 56-FF. The IRS challenged her deduction, saying the operation was cosmetic surgery. But a Tax Court judge allowed this taxpayer to claim a depreciation deduction for her new, um, assets, equating them to a stage prop. Alas, the operation later proved to be a problem for Ms. Love. She tripped, rupturing one of her implants. That caused a severe infection, and the implants had to be removed.

Burning Down the House
BURNING DOWN THE HOUSEA “Breaking Bad” wannabe purchased a building that had been used by a religious sect and turned it into a drug lab. Unfortunately for him, a hot plate ignited his volatile chemicals, and the resulting fire gutted the building, rendering it unusable. He claimed he was entitled to a $9,000 casualty loss. Even though he was involved in an illegal activity and acted negligently, the Tax Court allowed him to claim the write-off.

Cat Food
CAT FOODA couple who owned a junkyard were allowed to write off the cost of cat food they set out to attract wild cats. The feral felines did more than just eat. They also took care of snakes and rats on the property, making the place safer for customers. When the case reached the Tax Court, IRS lawyers conceded that the cost was deductible.

Cat Food, Part II
CAT FOOD PART IIA woman used her own money to care for feral cats that she fostered in her home for a charity that specialized in the neutering of wild cats. She spent more than $12,000 of her own money paying for vet bills, food and other items. The Tax Court ruled that she can claim a charitable deduction for her expenses, but limited her write-off because she didn’t meet the substantiation rules, failing to procure a contemporaneous written acknowledgment from the charity each time she spent $250 or more on the charity’s behest. With the proper documentation, she could have deducted all the costs she incurred for the organization.

Can you really claim cat food?
CAN YOU CLAIM CAT FOODOkay, admit it: As you’ve struggled with your tax return, trying to come up with some extra deductions to pump up your refund or reduce what you owe, you’ve taken a few flights of fancy. “Can I claim a deduction for all those blood donations at the Red Cross?” Nope. “How about a charitable contribution for all the time I donate to the church?” No, again. “Can I count the wedding gift for my boss’s daughter as an employee business expense?” Come on!

On the other hand, your fellow taxpayers have successfully claimed write-offs for many things that most of us wouldn’t even imagine, ranging from cat food to a casualty loss for a vehicle totaled by a drunken driver.

Free Beer
FREE BEERIn a novel promotion, a service-station owner gave his customers free beer as a promotion. Proving that alcohol and gasoline do mix—for tax purposes—the Tax Court allowed the write-off as a business expense.

LANDSCAPINGA sole proprietor who regularly met clients in his home office was allowed to deduct part of the costs of landscaping the property, on the grounds that it was a part of the home being used for business, according to the Tax Court. The court also allowed a deduction for part of the costs of lawn care and driveway repairs.

Making Movies
MAKING MOVIESA lawyer faced a challenge from the IRS as she sought to deduct losses during the six years she spent making a documentary film on the musical group Up With People. The IRS claimed the long series of annual losses indicated that her filmmaking activities were a hobby, asserting the project was essentially a high-cost home movie because her husband once was a member of that group. Furthermore, at one point during hearings, the judge reviewing the case suggested that documentary filmmaking is by nature not-for-profit—amusing that so alarmed the film industry that a number of well-known filmmakers filed friend-of-court rulings to say, in essence, that you can make money with documentaries. Ultimately, the court ruled in her favor, allowing her deduction of six-figure losses. It noted that she acted in a businesslike manner, hiring staff such as a bookkeeper, buying insurance, consulting experts, changing the story line to make the film more marketable, blogging about it, and taking it on tour to movie festivals.

Payments for Wrongdoing
PAYMENTS FOR WRONGDOINGAn insurance company sued two doctors for insurance fraud. The doctors admitted liability and agreed to reimburse the insurer for the losses it sustained, and the insurance company agreed to release a claim for restitution in a pending criminal case. The IRS ruled that the repayments are deductible provided that the doctors originally included the money in their incomes in prior years. But to demonstrate that crime doesn’t fully pay, the IRS said the repaid funds are a miscellaneous itemized deduction that’s allowed only to the extent it exceeds 2% of the doctors’ adjusted gross incomes.

Playing Bass
PLAYING BASSAn accomplished bass player and music professor laid a major beat down on the IRS. He traveled to jazz rehearsals and performances to keep his skills sharp so he could play with other well-known musicians. The IRS said he could not deduct his travel costs because he enjoyed playing the bass and performing wasn’t part of his teaching duties. Nevertheless, the Tax Court allowed him the write-off because he translated what he saw and heard in the music scene and taught it to his students.

Significant Other
SIGNIFICANT OTHERA man hired his live-in girlfriend to manage several of his rental properties. Her duties included finding furniture, overseeing repairs and running his personal household. The Tax Court let him deduct as a business expense $2,500 of the $9,000 he paid her but disallowed the cost of her housekeeping chores as nondeductible personal services.

Swimming Pool
SWIMMING POOLA taxpayer with emphysema put in a pool after his doctor told him to develop an exercise regime. He swam in it twice a day and improved his breathing capacity. Turns out he swam in the pool more than his family did. The Tax Court allowed him to deduct the cost of the pool (to the extent the cost exceeded the amount it added to the value of the property) as a medical expense because its primary purpose was for medical care. Also, the cost of heating the pool, pool chemicals and a proportionate part of insuring the pool area are treated as medical expenses.

How to Claim the Saver’s Credit
The saver’s credit can be worth as much as $1,000 for individuals and $2,000 for couples who save in 401(k)s and individual retirement accounts. And this tax credit can be claimed in addition to the tax deduction for traditional retirement account contributions. Here’s how to take advantage of this tax credit for retirement savers.

Save in a 401(k) or IRA. The saver’s credit can be claimed on up to $2,000 for individuals and $4,000 for couples for funds contributed to IRAs, 401(k) plans and similar workplace retirement accounts. But awareness of this valuable tax credit remains low, with just 28 percent of Americans saying they know about the saver’s credit, according to a survey of 4,143 workers by Harris Poll for the Transamerica Center for Retirement Studies.

Meet the income requirements. The saver’s credit is meant to help low- and middle-income workers save for retirement. The income limits for 2014 are $30,000 for individuals, $45,000 for heads of household and $60,000 for couples. These income limits are adjusted annually to keep up with inflation and will increase to $30,500 for individuals, $45,750 for heads of household and $61,000 for couples in 2015.

Watch out for other restrictions. The saver’s credit cannot be claimed by people under age 18, full-time students or those who are claimed as a dependent on someone else’s tax return. Distributions from retirement accounts can also reduce the credit amount.

Calculate your credit. The amount of the credit ranges from 10 percent to 50 percent of the amount contributed to a retirement account up to $2,000 ($4,000 for couples), depending on your income. “The less income you have, the more of the credit you get,” says Robert Reed, a certified financial planner for Partnership Financial in Columbus, Ohio. “It’s specifically targeting middle-income working folks.” To get a 50 percent credit in 2014, retirement savers need to earn $18,000 or less ($36,000 or less for couples). Those earning between $18,001 and $19,500 ($36,001 to $39,000 for couples) get a 20 percent credit. And savers earning between $19,501 and $30,000 ($39,001 and $60,000 for couples) get a 10 percent credit. So a couple earning $30,000 who puts $1,000 in an IRA could earn a $500 credit, in addition to the tax deduction for the same contribution. A couple earning $58,000 who saves the same amount in an IRA would get a $100 credit.

Stack your tax benefits. The saver’s credit can be claimed in addition to the tax deduction you get for contributing to a traditional 401(k) or traditional IRA. “It has a triple benefit because you can save for retirement on a tax-deferred basis, the amount of the credit reduces your tax bill and you get to enjoy the benefits of the long-term compounding of investments that you make in the retirement account,” says Catherine Collinson, president of the Transamerica Center for Retirement Studies. The saver’s credit can also be claimed for contributions to Roth 401(k)s and Roth IRAs.

Meet the deadlines. To qualify for the saver’s credit, contributions must be made to 401(k)s, 403(b)s, 457s or the federal government’s Thrift Savings Plan by the end of the calendar year. However, retirement savers have until April 15, 2015, to make an IRA contribution that could qualify them for the saver’s credit for tax year 2014. “If you are using a 401(k) or an employer plan, you are kind of out of luck after the end of the year. But if you contribute to a traditional or a Roth IRA, you have until April 15 to make that contribution and make it count for the 2014 year,” says Lindsey Buchholz, principal tax research analyst for H&R Block. “It’s one of the few things that lets you make a decision after the close of the tax year and still reap the benefit.”

Fill out the correct forms. Make sure you use the correct tax forms to claim the saver’s credit. “The saver’s credit is not available on the 1040 EZ form,” Collinson says. Form 8880 will allow you to calculate your credit, and this form can be attached to form 1040, 1040A or 1040NR.

Don’t expect a large credit. The maximum possible saver’s credit is $1,000 for individuals and $2,000 for married couples, but most people don’t get that much. “It is often much less, and due in part to the impact of other deductions and credits may, in fact, be zero for some taxpayers,” according to a statement from the IRS. In tax year 2012, saver’s credits worth $1.2 billion were claimed on over 6.9 million income tax returns. The credits averaged $127 for individuals, $165 for heads of household and $215 for couples.