Wednesday, January 26, 2011

10 Common Tax Deduction Myths Debunked

No one wants to pay more in taxes than they have to. This is why we are all rightfully obsessed with claiming every deduction and credit we can. Unfortunately, there are a lot of myths about what is a deductible expense and what isn’t. Read on to find the top tax deduction myths debunked, and avoid the nightmare of IRS troubles.

Myth 1: I can write off my mortgage payments

Actually, you can only write off interest paid on your home loan, not the full payment. You should receive an IRS Form 1098 from each of your mortgage lenders that will tell you exactly what you can deduct.

Myth 2: If I use my home phone to make work calls, I can deduct my phone bill

The IRS is very strict about not letting taxpayers deduct the cost of their home phone. If you have a second business line put in for your home office, then you can deduct that expense, but not your first home line.

Myth 3: All fees paid to an attorney can be deducted on my return

Unfortunately, most legal fees do not qualify for deductions. There are only a few types of expenses paid to an attorney that can be deducted on your return, such as alimony collection efforts, estate tax advice, business assistance, etc. Check out this article on the RDTC blog for information about deductible legal expenses.

Myth 4: I can deduct my health club fees as medical expenses

Unless a doctor prescribes a specific diet or exercise plan to treat a medical condition (meaning it is not preventable care) then you cannot deduct your gym or diet program.

Myth 5: The cost of any Energy Star product is fully deductible

Unfortunately, only some energy efficient home improvements qualify for federal credits, and even so, there are limits and restrictions. Check out EnergyStar.gov for more information.

Myth 6: I can write off training expenses for our family pet

Unless you are training a guide dog, you cannot deduct expenses related to pet care or training for your family's dog, cat, rabbit, etc. If you are raising a guide dog, then you can deduct the costs of buying, training, and maintaining these animals, but be sure to see a tax professional to ensure you claim the correct deduction.

Myth 7: All of my medical expenses are deductible

This is a very common misunderstanding. Unfortunately, you will only qualify to deduct your medical expenses if they exceed 7.5% of your adjusted gross income.

Myth 8: I can make up values for all of my charitable contributions

Over the past few years the IRS has been cracking down on non-cash charitable contributions. Be sure that you only deduct the fair market value for the goods, and of course keep receipts and proof of what you donated. For more information on the charitable contribution deduction check out this article on RDTC.com.

Myth 9: My DMV registration fees are fully deductible

You can only deduct a specific part of your yearly DMV registration fees. According to IRS Topic 503, "deductible personal property taxes are those based only on the value of personal property such as a boat or car. The tax must be charged to you on a yearly basis, even if it is collected more than once a year or less than once a year." Your registration papers should identify which portion of the total can be deducted.

Myth 10: I can deduct the cost of the clothing I bought for my new job

Unfortunately the IRS is very strict on the unreimbursed job expenses you can deduct, and unless the clothing you purchase is a required uniform that is not to be worn outside of work, it will not qualify. For example, if you have to buy shirts with the company's logo, they may qualify, but a new suit you buy for an office job most definitely cannot be deducted on your return.