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It's That Time of Year Again |
The clock is ticking down to the April 15 tax filing deadline.
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Out-of-the Ordinary Tax Deductions
As the tax filing season goes down to the wire, you may hear about some strange deductions. The IRS generally won't accept write-offs that appear out-of-the-ordinary. And if you make claims without having solid tax authority, you're not likely to prevail if you pursue the matter further in court.
But that doesn't mean taxpayers can never take unusual deductions. Here are some examples.
 Pumping up business write-offs. The Tax
Court allowed a professional bodybuilder to deduct the cost of lotions and body oils he applied before posing or working out. Reason: The products were specifically marketed to professional bodybuilders through magazines and not readily available to the public. However, the court denied deductions for power shakes and the three pounds of buffalo meat the taxpayer consumed daily. (Wheir, TC Summary Opinion 2004-117)
Sweet tax music. Medical expenses are deductible to the extent the annual total exceeds 7.5 percent of your AGI. They cover expenses for the diagnosis, cure, mitigation, treatment or prevention of illness or disease. In one unusual ruling, the IRS allowed parents to deduct the cost of a child's clarinet lessons. Reason: Playing the instrument helped improve the child's overbite. (IRS Revenue Ruling 62-210)
 Diamonds may be forever but they can be damaged. The Tax Court allowed a deduction for a casualty loss after a man accidentally dropped his wife's diamond ring in the garbage disposal and turned it on. (Carpenter, TC Memo 1966-228)
Breathing in a deduction. A medical
expense deduction may be allowed even if the treatment is expensive or less costly care is available nearby. Example: The Tax Court permitted a couple to deduct the cost of sending their child to an Arizona boarding school to alleviate respiratory problems. This included travel and room and board. (Stringham, 12 TC 580)
Pulling out all the stops. You can't deduct
business entertainment that is "lavish or extravagant." But where is the line drawn? In 1989, a couple who were real estate developers threw a year-end bash. They invited real estate agents who had sold at least two of their homes. The party, featuring country singer Barbara Mandrell, cost almost $350,000 but a district court approved the deduction. (Moore, DC-VA., 96-2 USTC 50,413)
Moving Fido. If you qualify,
you can deduct the cost of moving personal belongings due to a job change (or taking a first job). However, you must meet two tax law tests pertaining to distance and time. IRS Publication 521, Moving Expenses, states that qualified taxpayers can deduct the cost of shipping household pets to a new home. The IRS approved this for a family dog. (IRS Revenue Ruling 66-35)
Getting the pick of the litter. A
couple owned a junkyard and put out pet food to attract wild cats. The cats got rid of rats and snakes that were scaring off customers. When the case reached Tax Court, the IRS conceded that $300 of cat food was deductible as a business expense. (Seawright, 117 TC No. 24)
Do you have a claim that seems too unusual to qualify for a deduction? Run it by your tax adviser. |
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Most people don't like spending valuable business time keeping records. But it can save money. Good records help monitor the progress of your business, prepare financial statements, identify receipt sources, keep track of deductible expenses, prepare your returns, and support items reported to the IRS.
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Here are eight tips that cover a variety of situations -- whether you already filed your tax return, are waiting until the last minute, or planning to file an extension.
Contribute to an IRA or SEP. There still may be time to reduce your 2007 tax liability by contributing to a traditional IRA or a Simplified Employee Pension (SEP).
If you qualify, you can make a deductible contribution to a traditional IRA right up until April 15, 2008 and benefit from the resulting tax savings on your 2007 return. (You also have until April 15 to make a Roth IRA contribution.)
How much can you contribute? For the 2007 tax year, you can contribute up to $4,000 in a traditional or Roth IRA, with an additional $1,000 "catch-up" amount for those age 50 and older.
As you probably know, "phase-out" rules restrict the ability of many people to make deductible contributions to traditional IRAs and contributions to Roth IRAs. The phase-out ranges, which are based on modified adjusted gross income (MAGI) are listed at the bottom of this article.
Small business owners can set up and contribute up to $45,000 for the 2007 tax year to a SEP plan up until the due date for their returns, including extensions. (There is no catch up contributions for SEPs.)
Verify to Avoid Trouble. It's wise to check certain facts and figures after having your return professionally prepared. Before sending your return, ensure the names and Social Security Numbers (SSN) are correct.
The IRS publishes an annual list of the top errors made on returns. Many involve names and SSN that are invalid or do not match federal records. Sometimes, for example, two numbers become transposed. It's best to clear up these issues before filing.
Keep in Mind that Tax is a Match Game. The IRS electronically matches the information you report on your tax return with what is reported by others, on documents such as W-2s and 1099s.
If there are discrepancies, your return may be flagged for closer IRS scrutiny. Tell your tax adviser about all income even if you didn't receive a form, including small amounts of bank interest income.
If you receive an incorrect 1099 or W-2, a corrected copy should be issued. Ask your tax adviser how to proceed.
Split a Directly Deposited Refund in Up to Three Accounts. You can request to have it deposited in one, two, or three different U.S. financial institutions, such as banks, credit unions, mutual funds, and brokerage firms. There is no requirement to divide the deposits equally.
Check on Your Refund. After filing, you can't speed up your refund, but you can find out about its status. Click here to use the IRS Where's My Refund? tool or call the toll-free Tele-Tax number (1-800-829-4477) to find out the status of your refund.
You need: Your Social Security Number or Tax ID Number, filing status and the refund amount.
Depending on whether the return was original or amended, and whether you filed on paper or electronically, you generally get one of several responses:
- An acknowledgment that your return was received and is in process.
- The mailing or deposit date of your refund.
- Notice of a problem, such as an undeliverable refund due to an incorrect address.
Need More Time? Get an Extension. Sometimes, it's just not possible to gather your tax information and file by the due date. The IRS allows taxpayers to request an automatic six-month extension of the due date, by filling out Form 4868. Click here for the form.
An extension gives you until October 15th and allows you to avoid incurring "failure to file" penalties. However, it only provides extra time to file, not to pay. Whatever tax you estimate is owed must still be sent by the April 15 due date of the return, or you will incur penalties.
Fix an Error After Filing. What happens if you file your return and then find you overlooked something? Depending on the situation, you may need to amend your return. If the amendment involves an error in your favor, you may be eligible for a refund. Keep in mind that there are statute-of-limitation deadlines for amended returns. Ask your tax adviser for more information.
Be Aware of Another Deadline. April 15 is not only the deadline for your 2007 tax return, it's also the deadline for the first quarterly estimated tax payment for 2008, if you are required to make one. (The due date for the second 2008 installment is Monday, June 16th.)
If you don't pay enough estimated tax during the year, you may be liable for a tax penalty on top of the tax that is ultimately due.
Fortunately, the tax law provides several "safe harbors" for avoiding an estimated tax penalty. No penalty is imposed if your annual payments equal at least:
- 90 percent of the current year's tax liability or
- 100 percent of the prior year's tax liability (110 percent if your adjusted gross income for the prior year was over $150,000).
The penalty may also be avoided if you pay installments on an "annualized basis." Ask your tax adviser for more information.
Want to Contribute to a Traditional or Roth IRA? Check this Table
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For 2007 |
Deductible Contributions to Traditional IRAs |
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Filing Status |
Modified Adjusted Gross Income Phase-out Range |
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Unmarried person |
$52,000 to $ 62,000* |
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Married joint filer |
$83,000 to $103,000* |
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Joint filer non-participating spouse |
$156,000 to $166,000** |
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Married filing separate |
$ 0 to $10,000*** |
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* Applies when individual is a 2007 retirement plan participant.
** Applies when individual is not a 2007 retirement plan participant, but spouse is a participant.
** Applies when individual or spouse is a 2007 retirement plan participant. |
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For 2007 |
Contributions to Roth IRAs |
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Filing Status |
Modified Adjusted Gross Income Phase-out Range |
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Unmarried person |
$ 99,000 to $114,000* |
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Married joint filer |
$156,000 to $166,000* |
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Married filing separate |
$ 0 to $10,000* |
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* Roth IRA phase-out ranges apply regardless of whether the individual or spouse is a 2007 retirement plan participant. |
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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