Thursday, February 25, 2016

10 Creative (But Legal) Tax Deductions


* Thoughts to carry throughout the year.

Politicians are always taking corporations and the super-rich to task for exploiting loopholes in the tax code. Don't you wish someone was yelling at you for paying too little in taxes? Where are the loopholes for the average American taxpayer? The best we can hope for is to take as many deductions as humanly (and legally) possible.
It's tax time again, which means it's time to get creative with those deductions. Can you convince the Internal Revenue Service (IRS) that your pet iguana is a service animal? Can you deduct toilet paper as a business expense because you come up with some of your greatest ideas in the bathroom? Can you deduct your bar tab as a form of stress reduction therapy? No, but you'll give your auditor a good story to tell around the IRS water cooler.
Keep reading for our list of 10 creative tax deductions that won't land you in jail. Think of them as loopholes for the little guy.
Image result for pics of u haul trucks
If you move to another town for a new job, the Internal Revenue Service (IRS) will let you deduct a portion of those expenses from your taxable income. But did you know that you can even deduct moving expenses if you're self-employed? Or if you get fired from the job that you moved for in the first place? Yup, the IRS is uncharacteristically generous with this one, so take full advantage!
The IRS applies two basic "tests" to determine if you can deduct moving expenses: distance and time. First, the distance test: If you move for a new job -- or even to find a new job -- the new location must be at least 50 miles (80 kilometers) farther than the distance of your old commute [source: Internal Revenue Service]. So if you used to drive 30 miles (48 kilometers) to work, the new location must be at least 80 miles (129 kilometers) from your old home. If you're self-employed and work from home, then you only have to move 50 miles away, which can be as close as the neighboring city or town.
Now the time test: Once you move into your new location, you must be employed full time for at least 39 weeks of the next 12 months [source: Internal Revenue Service]. What's great about this is that you don't have to work for the same company that brought you out to the new location. Even if you quit that job or get canned, you can still deduct the moving expenses if you get another job in the same geographical area that keeps you employed for the minimum 39 weeks. Note that if you're self-employed, the time rule is more strict; you must remain employed full time for at least 78 weeks of the next 24 months after the move [source:SmartMoney].
What exactly does the IRS let you deduct as moving expenses?
  • Packing and shipping costs (moving company, for example)
  • Up to 30 days of storage
  • Travel to the new home, including gas at $0.24 a mile
  • Hotel rooms, but not meals
  • Disconnecting utilities at the old home and connecting new ones [source:SmartMoney].
The cool thing about moving expense deductions is that they're an "above the line" deduction, meaning you don't have to itemize deductions to claim them [source:Smartmoney.com]. Now let's look at some ways to get creative with education expenses.
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The U.S. tax code is designed to encourage certain purchases and activities that strengthen society. Home ownership is one of those, and so is higher education. That's why the Internal Revenue Service (IRS) lets you deduct the interest you pay on both home mortgage loans and student loans. But did you know that you can deduct the interest paid on student loans -- even if you aren't the person that's paying it? If you qualify, you can deduct up to $2,500 in student loan interest every year.
As the IRS sees it, the person who is legally obligated to pay back a student loan has the right to deduct the interest [source: TurboTax]. In most cases, that person is the student. So even if your parents are the ones writing the check each month, you can still deduct that interest on your tax return [source: Stanton].
With the IRS being the IRS, nothing is straightforward, so there are a few conditions that could potentially disqualify you from claiming the interest deduction on your tax return:
  • If you're claimed as a dependent on someone else's tax return (your parents', for example), then you cannot claim the deduction.
  • If your modified adjusted gross income is greater than $75,000 for a single filer or $155,000 for a married couple filing jointly, then you can't claim student loan interest as a deduction.
  • If the loan is a Direct PLUS loan for parents or a similar loan in which your parents are legally obligated to repay it, then you can't deduct the interest from that loan [source: TurboTax].
Now let's look at some creative deductions you can take from contributing to a good cause.
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