Tax codes contain many unusual deductions and credits, such as cloth diaper taxation in Wisconsin while disposable diapers remain tax free or deducting bribes paid to government officials in Germany.
Dependent upon your income and filing status, certain write-offs could lower your tax bill or boost your refund amount. Here are a few commonly overlooked deductions:
1. Home Office Deductions
Home office deductions are an attractive tax break available to people who work from their own homes, including self-employed individuals, small business owners and freelancers. They allow individuals to deduct costs related to their workspace from their taxable income such as desks, supplies and even some mortgage interest and utilities costs, said Glum.
To qualify, the workspace must be used exclusively for business, without serving other purposes such as recreation rooms or bedrooms. Deductions can be claimed using either the regular method (calculate and file IRS Form 8829), or simplified method allowing taxpayers to claim $5 per square foot up to 300 square feet.
As well as possessing a qualified workspace, taxpayers must also meet certain eligibility requirements such as being either homeowners or renters of property and conducting at least some type of business activity during at least part of each year.
2. Vehicle Expenses
Owning and operating a vehicle can be expensive, especially when used both personally and for professional purposes. Luckily, some taxpayers may qualify to deduct some or all of their vehicle expenses on their tax returns.
It can be easy to overlook this deduction, which could prove substantial depending on driving habits and vehicle costs. To facilitate vehicle expense deduction calculations, the IRS provides two methods – standard mileage rate method and actual expenses method – as part of their vehicle expense deduction calculation toolkit.
Utilizing the standard mileage rate method is typically easier and may result in larger deductions; however, to substantiate each business trip you must keep meticulous records regarding who, what, when, where and why each trip occurred. Both approaches have their own set of benefits and drawbacks so it is advisable to consult a tax professional before selecting one over the other.
3. Contract Labor
Contract labor can provide flexibility and efficiency while saving money at tax time, but hiring contract workers does come with many rules and regulations; should the IRS or Department of Labor find you misclassifying workers, this could cost your business thousands in fines and back taxes.
The IRS may not be known for their generous, liberal approach to unusual tax deductions, but they do occasionally grant them. One bodybuilder was even permitted to deduct his body oil costs as business expenses! Likewise, breast implants purchased for an erotic dancer was allowed because the IRS determined they were necessary tools in her job role as an artist. While tax credits offer greater value than deductions – lower your tax bill dollar-for-dollar!
4. Business Insurance
Tax deductions and credits provide American wage earners with ways to keep more of their hard-earned income rather than giving it over to the IRS. Unfortunately, however, due to changes made by the 2017 Tax Cuts and Jobs Act many itemized deductions became less useful or were eliminated altogether.
Tax deductions (also referred to as “tax write-offs”) are expenses that reduce taxable income and qualify as tax write-offs, unlike credits which offer dollar-for-dollar reduction of your actual tax bill. Tax deductions generally only benefit itemizers; despite this fact some people have attempted to take advantage of oddball deductions which the IRS often denies; these have occasionally been approved by tax courts in specific instances such as:
5. Mortgage Points
Purchase of mortgage discount points can save you money over time by lowering your interest rate, but before making this investment, be sure to consider your budget, loan terms, and future plans when making this decision. In general, mortgage points are tax deductible if itemizing deductions rather than taking the standard deduction amount.
Understanding the difference between tax credits and deductions is essential. Tax credits provide a dollar-for-dollar reduction of taxes; deductions reduce how much income is subject to taxation. There are a variety of deductions you may qualify for, from unreimbursed medical expenses to mortgage interest.
