Learn about tax write-offs and the forms to fill out.
While tax filers used to be able to blame a dubious tax write-off on a tax advisor, the U.S. Treasury Department now holds taxpayers accountable, which means taxpayers need to know what will and will not catch the attention of the IRS.
Under the current tax policy, the U.S. Treasury Department has over 75 provisions it can use to asses penalties for dubious tax write-offs. There are two major areas that cause problems with tax write-offs: problems with Form 2106 and deductions for charitable donations.
The IRS doesn't look kindly on creativity when it comes to tax write-offs. Some of the more dubious tax write-offs include listing a pet as a dependent, including veterinary bills as medical bills and trying to write off home office space. The issue of claiming pets as dependents has lead the IRS to require a Social Security number for any dependent listed. In one tax write-off attempt, a pet owner tried to deduct doggy day care under the day care tax credit.
Other gray areas occur when personal and business expenses are mixed, including the home office deduction. While some people may be able to claim a home office as a tax write-off, it must be done carefully. It is not a good idea to write off a home office if there is no income coming in from a home business. The IRS would likely look on that with suspicion.
Some people also try to deduct expenses for hobbies related to their industry. For example, one person tried to deduct theater tickets because he taught art. In order to keep things fair, the IRS requires employees to fill out Form 2106 to determine tax write-offs for legitimate business expenses.
Employees can deduct non-reimbursed expenses that exceed two percent of their adjusted gross income. Most people will not have that many expenses, but people who use their personal vehicles extensively for work, such as a salesperson, could easily exceed the two percent if their employer does not pay car expenses. In order to claim non-reimbursed expenses as a tax write-off, an employee must file Form 2106.
One of the most common problems with tax write-offs is failing to keep and provide the correct records. According to the Georgia Department of Revenue, a person cannot include expenses for travel, entertainment, use of a car or gifts unless records have been kept documenting the expenses. According to Entrepreneur Media, deducting travel expenses and 50 percent of meals and entertainment is an acceptable tax write-off, provided the travel was required for business.
After filling out Form 2106, the employee transfers the amount of non-reimbursed expenses to Line 20 on Schedule A for IRS Form 1040. An exception to this occurs for fee-based government employees, individuals with disabilities and qualified performing artists. These individuals need to determine whether or not they need to use Line 10 to report their tax write-offs. It is important to only deduct the appropriate qualified items on the form. In some cases, people get into trouble because they enter the same deduction on two different forms. This can happen in the areas of school tuition, cellular phone deductions or property requiring amortization or depreciation.
Another area that may catch the attention of the IRS is charitable donations. MSN Money reports that in 2006, charitable donations were the third most often claimed tax write-off with $173 billion being written off. In some cases, the IRS sets a limit of how much can be deducted for specific areas, so giving over the limit won't mean a larger deduction. Contributions of property are the primary problem area. It is up to the taxpayer to put a value on the property. When it is a high-value item, the taxpayer may overvalue the contribution. Some examples of high-value items include:
Another deduction relating to charitable contributions is cash donations to unauthorized organizations. Donations to some foreign charities fall under this category. In some cases, the IRS may investigate whether a charitable donation should have required a quid pro quo receipt. This is required any time a donation is made in exchange for a product or service. For example, if a person donates to a charity and receives concert tickets, the value of the tickets must be deducted from the amount that can be claimed. Failing to deduct the value of the product or service may disqualify the deduction.