It is a fact of life. The current tax system rewards taxpayers who are aggressive with their deductions. To find out what people are deducting, we undertook an informal survey of many of our colleagues who are certified public accountants. We found that a handful of deductions show up repeatedly on the tax returns of those taxpayers who tend to be very aggressive with their deductions. How aggressive are you with the deductions you claim on your income tax return each year (Box)? Below we discuss some of the more common deductions we have found.
Home Office Deduction
Two things make claiming the home office deduction very attractive. First, the rules are pretty liberal regarding who is eligible to claim the home office deduction, and if you do not own your home, the rent you pay is not otherwise deductible on your federal tax return.
A review of the rules shows that to be eligible for a home office deduction, you must use a portion of your home regularly and exclusively for your trade or business. If your home office is used even one day during the year for any other purpose, no deduction will be allowed. In addition, you must perform either the income-producing activity or your administrative or managerial tasks within the home office on an ongoing basis to qualify for this deduction.
Temporary Job Assignment
Temporary job assignments provide taxpayers with the opportunity to claim a huge tax deduction. As long as the following 3 conditions are met, individuals can deduct all of their travel and living expenses while away from home on a temporary job assignment: (1) the assignment must be for a specific length of time, (2) the assignment must last for a period of ≤1 year, and (3) the taxpayer must continue to be engaged in business activities in the general vicinity of the original home, incur duplicated living expenses, or intend to return to his or her original home after the temporary assignment ends.
Just imagine how huge this deduction can be. Remember, someone qualified to claim the temporary job assignment deduction can deduct travel to and from the job location plus the total amount spent for lodging for up to a full year plus a daily per diem allowance of up to $71 per day (see below).
Claiming the automobile deduction has been a favorite of aggressive taxpayers for years. In 2015, taxpayers are allowed to claim a deduction of $0.575 per business mile driven, which includes the following: (1) travel between 2 different workplaces, (2) travel between a residence and a temporary workplace at which a person works on an irregular or short-term basis of <1 year, and (3) travel to and from job interviews, conferences, and continuing education seminars that qualify as deductible business expenses.
Since the only information needed to calculate the automobile deduction is the number of business miles driven, it is not too difficult to see why this is one of the favorite deductions for taxpayers who like to be aggressive with their deductions.
Individuals who itemize their deductions are allowed to claim a deduction for contributions they make to qualified charitable organizations. The gift can be cash, check, or property. Gifts of property, such as clothing and household items, are known as noncash contributions and are deductible based on the fair market value of the donated property as of the date of the gift. To deduct a noncash contribution of up to $5000, the person who made the donation is asked to determine fair market value. Enough said.
Per Diem Rates
Each year, you might travel quite a bit in connection with conferences and seminars, job searches, and/or temporary job assignments. The cost of travel, lodging, and 50% of the cost of meals incurred while away from home (and not reimbursed) in connection with these business trips is generally deductible.
You can track the cost of meals and incidentals incurred while away on business in 2 different ways. You can either keep receipts each time you eat a meal during your business trips, or you can use the per diem rates established by the Internal Revenue Service (IRS). Depending on the city, the per diem rate is up to $71 per day. A list of per diem rates by state can be found in IRS Publication 463, “Travel, Entertainment, Gift, and Car Expenses,” or by using the interactive tool available at the US General Services Administration website found at www.gsa.gov.
Taxpayers who are aggressive with their deductions generally prefer to base their meals and entertainment deduction on the per diem rates, since the only information needed to calculate their deduction is the number of days they were away on business. From what we have seen, these taxpayers seem to find a business purpose for every trip they take.
Just about everyone has friends, family members, or colleagues at work who are very aggressive with the tax deductions they claim. Every year, at about this time, they start telling you about all of the crazy things they deducted last year. And then they usually try to convince you that what they deducted must be okay, since the IRS never disallowed any of their deductions. Even though the IRS did not question their deductions, however, that should not be interpreted to mean that what they claimed is allowable. It simply means that the IRS did not select this person’s tax return for audit. Remember, everything is deductible until you get audited.
- Yes, I claimed more than 20% of my residence as a home office (+2 points)
- Yes, but less than 20% of my residence qualifies as a home office (+1 point)
- I either was not eligible to claim the home office last year, or I own my home and decided not to claim the home office or to claim the new simplified home office (0 points)
- I do not own my home, and I do have a home office, but I did not want to raise any red flags, so I did not bother claiming the home office deduction (–2 points)
- Yes, and the deduction was huge (+2 points)
- Yes, but I only deducted my travel expenses and did not deduct for my lodging or my food because the deduction seemed excessive (+1 point)
- I never had a temporary job assignment (0 points)
- I was eligible, but did not want to raise any red flags (–2 points)
- Each year, I deduct at least 75% of my car’s mileage as a business expense (+2 points)
- Each year, I keep a very accurate log, and only deduct the automobile mileage that I am eligible to claim (+1 point)
- I never use a car in connection with my work (0 points)
- I could claim some of my mileage as business miles, but do not want to raise a red flag (–2 points)
- Yes, and the deduction I claimed was more than $500 (+2 points)
- Yes, but I kept the deduction to less than $500 because I did not want to attach the noncash contributions form (+1 point)
- I did not make any noncash contributions last year (0 points)
- No, even though I gave away lots of stuff, I did not bother to get any receipts and do not want to raise any red flags (–2 points)
- If I get on a plane, it is a business trip, no matter what (+2 points)
- I have no problem deducting my business travel, if the trip is 100% business (+1 point)
- I never have to travel for my job (0 points)
- I traveled quite a bit and was not always reimbursed by my employer, but I did not deduct my business travel because I did not want to raise a red flag (–2 points)
Interpreting your score:
- ≥5 points, consider yourself aggressive
- ≤4 and ≥–4, you are the average taxpayer
- ≤–5, consider yourself a timid taxpayer!