19 Believe It or Not Tax Breaks
Your fellow taxpayers have successfully claimed write-offs for many things that most of us wouldn't even imagine. But be careful if you plan on following their lead.
As you struggle with your tax return, trying to come up with some extra deductions to pump up your refund or reduce what you owe, don't you sometimes think about taking a few flights of fancy? We've all done it, conjuring up in our heads miraculous tax write-offs until we're brought back to reality. "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 claim my dog as a dependent?" (This was asked years ago by the author's mom.) 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 body oil used by a professional bodybuilder.
Here are 19 of our favorites.
Compensation for Being (Wrongly) Locked Up
With exonerations on the rise, thanks in part to advances in DNA testing that have helped the wrongfully incarcerated win their freedom, Congress has taken a step to make amends as well. Compensation that these victims receive is fully exempt from federal taxation.
Genetic Testing Kits
Speaking of DNA testing, many people nowadays use a DNA ancestry company to find out not only the regions and ethnicities of their ancestry, but also for genetic testing.
And here's some good news if you buy a kit from 23 and Me: The IRS said that part of the price of the combined health and ancestry kit produced by the company may be treated as a deductible medical expense. People who buy the DNA collection kit and pay extra to include the genetic testing can allocate the kit's price between the nondeductible ancestry services and the deductible health testing (generally treated as a medical expense deductible by itemizers on Schedule A to the extent total medicals costs exceed 7.5% of adjusted gross income). People who buy the cheaper kit only for ancestry services won't get a deduction.
You can also use flexible health spending account funds or your health savings account to pay for the genetic health services.
An accomplished bass player and music professor laid a major beatdown 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.
Being a Starving Artist
This deduction is both obscure and listed right there on the tax forms. If you are a "performing artist," you have the ability to deduct business expenses related to your work, even if you don't itemize—it's one of the rare "above the line" tax deductions.
But before you dance an extra little jig, note the considerable restraints on this deduction: You have to have at least two employers (not gigs—actual W-2 income), and each has to pay you at least $200. Your expenses have to be at least 10% of what you make as a performer. But here's the real kicker: Your adjusted gross income can't be more than $16,000, even if you're married.
Why so low? The value was set in 1986 and has never been adjusted for inflation.
Phones, Phones and More Phones
A self-employed attorney with his own law practice worked out of his home. He had a designated office which he used regularly and exclusively as his principal place of business. He claimed many deductions related to his home office, including the cost of utilities. He had five business telephone lines and a cell phone. Though the Tax Court denied some of his other deductions on Schedule C, it did allow him a $6,500 tax write-off for the telephone expenses.
A couple who owned a junkyard was 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
A 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.
A 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.
A self-employed consultant who worked in her condominium sued her neighbors and the condo association, alleging that her work was disrupted by noise from faulty construction and barking dogs. Also, in connection with the litigation, she was charged with a criminal misdemeanor. She deducted $26,000 of attorney fees associated with both of these proceedings as business expenses.
The IRS said the legal fees were personal costs. But the Tax Court OK'd half of the write-off because she used 50% of the condo for business, and the IRS failed to prove that the noise didn't adversely affect her business use of the residence.
In a novel promotion, a service-station owner offered his customers free beer with a fill-up. Not surprisingly, his station's gasoline sales increased significantly. Proving that alcohol and gasoline do mix—for tax purposes—the Tax Court allowed the owner to deduct the cost of the beer as a business expense.
Tax Return Preparation Fees
Prior to 2018, people who itemize on Schedule A could deduct the cost of the fees they paid for tax preparation or tax software, but only to the extent that those fees and all other miscellaneous itemized deductions exceeded 2% of their adjusted gross income. Then came the 2017 tax reform law, which eliminated all miscellaneous deductions from 2018 through 2025 that were previously subject to the 2% of AGI threshold.
But did you know that if you file Schedule C, Schedule E or Schedule F with your return, you can still write off part of your tax return preparation fees. That's because the IRS said in 1992 public guidance that tax return preparation expenses incurred in preparing Schedules C (sole proprietors), E (rentals, royalties, partnership, S corporations) or F (farmers) are deductible in calculating AGI, meaning they are above-the-line deductions. People filing any of these three schedules are thus able to claim an allocable proration of their total tax preparation expenses on the corresponding schedule.
A 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—a musing 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.
Fees 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.
A 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.
A 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.
Helping Your Child's Career
A father owned a profitable real estate development business. His teenage son was a local celebrity for his successful motocross racing, so the father decided to have the company become a sponsor for his son's racing activity. Over a two-year period, the firm paid $160,000 for motorcycles, equipment and other costs. The funding ceased when the son turned pro.
The Tax Court said that most of the $160,000 was a deductible business expense because the firm obtained new business connections, favorable construction financing deals and other similar benefits from its sponsorship.
Rather 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.
Donating to charity can help people feel all warm and fuzzy inside. Charitable donations are also a great tax write-off for those who itemize on Schedule A of the 1040. And for 2020 and 2021, nonitemizers can claim up to $300 in charitable deductions (for 2021 only, the figure is $600 on joint returns). But did you know you can get a tax write-off for donating to The Satanic Temple in Salem, Massachusetts? In 2019, the IRS blessed The Satanic Temple as a 501 (c)(3) tax-exempt church. So, if you're feeling charitable, you can go on the organization's website and make a tax-deductible contribution of $666 or any other amount to The Satanic Temple.
King of Pop
Not many people have to pay federal estate taxes. That's because the federal estate and gift tax exclusion is so high ($11.7 million for people who die in 2021; $12.06 million if you die in 2022). And those few estates that are subject to the tax can afford lawyers to help them with all sorts of legal planning techniques to help them minimize the amount of tax they owe. And then there's Michael Jackson, the pop star who died in 2009. His estate claimed that the value of Jackson's name and image on death was $3 million. The IRS thought that was way too low, first arguing the value was $434 million and later cutting it to $161 million. The estate disputed the IRS's adjustments in Tax Court in a case that took nearly 10 years from start to finish. In a major win for the pop star's estate, the Tax Court valued Michael Jackson's name and likeness at death at $4.15 million.