Michele R. Davis


Materials, Musings and More


Deduction Junction, what's your function?

Posted on 20 September, 2013 at 22:02
Can I deduct the cost of the clothes I wear to work?
I have to dress up every day.
My employer requires me to keep my hair short.
Can I deduct what I pay my barber?
Our power went off and we lost everything in the freezer.
Can I deduct it as a casualty loss?
I play Bingo every Friday at the Catholic church.
Isn't that a charitable deduction?
I am very fortunate to have smart clients.  I have really smart clients.  It's sort of refreshing, to be honest. Goodness knows I've had my fair share of clients who were a few bricks shy of building themselves a solid wall of thought.  My uncle describes such people like this, "If common sense were dynamite, they wouldn't have enough to blow their nose."  You know the kind.
But even really smart taxpayers like to grasp at straws when it comes to potential tax deductions and tax credits.  And who can blame them?  With the top marginal tax rate settling in at 43.4% this year (that's including the lovely new Medicare surcharge), any and every possible deduction or credit needs to be considered, researched, and documented. 
Surprisingly, Congress rationalizes what types of expenses are deductible for individuals, sometimes using them as a means to accomplishing an agenda with the American people.  How can the government encourage college students to pay their education debt?  By making student loan interest deductible, of course!  How could Congress keep the crumbling housing market from bankrupting struggling homeowners?  By enacting short-term legislation making cancellation of debt against a primary residence non-taxable, silly!  Think of these potential tax deductions as trains carrying special political cargo, to specific political destinations, typically running on very precise political tracks
My three kids were always perfectly behaved for the babysitter. They told me so themselves.
Other tax-saving incentives are offered to sneakily increase tax revenues.  (If sneakily isn't a word, it should be.)  Seems odd that a tax credit could increase tax revenue for the government, doesn't it?  Consider the Child Care Credit.  This train carries a tax credit for parents one direction, but it carries reportable income for child care providers in the other direction.  Babysitting income is taxable by both income taxes and self-employment taxes.  So while Mom and Dad are enjoying a measly reduction of $400 on their tax bill, Betty Babysitter could have to burp up about $625 in taxes.  That's one crappy tax bill.  (That's a diaper pun there, get it?)
I'd have to say the Most Misunderstood Deduction Award would have to go to employee-related business expenses.  This past tax season I had an anonymous caller explain that her new tax preparer wouldn't let her deduct her water bill and cost of detergent as an employee-related business expense.  She was required to wear a clean uniform to work, she explained, and so she needed her return redone to include those expenses.  Uhm.  No.  But good luck to ya.  
Ask yourself this question when considering whether you have a deductible employee-related expense:  Does everyone else on this glorious planet have to do this in order to keep their job?  If the answer is yes, then your tax deduction answer is no.  Let's try a few examples.
          Do other workers have to drive to work?  Yes.  So mileage to work is not deductible.
          Do other workers have to be nicely groomed?  Yes.  So perms and highlights are not deductible.
          Do other workers have to be clothed?  Yes.  So that overcoat and bow tie are not deductible.
I just abide by the rules, I don't make them.  If I did, every pair of Kate Spade New York Lotties would be residing in my closet.
It's tough to make tax information interesting.
The most well-known deductions revolve around homeownership (mortgage interest, property taxes), medical insurance and expenses, state and local income taxes, and retirement savings.  These are pretty straightforward deductions and explaining them further would only be a complete and utter snoozefest.
If you think something might provide you some tax savings, ask your accountant.  There's no such thing as a stupid question.  (Well, except for Ms. Laundry Caller's.  That one made me want to jab a pencil in my eye.) 
And if you have extra bricks in your load, share them.  Maybe you can prevent brick-deprived people from being so taxing on the rest of us.
PS - The answers to the four questions at the top of the page are no, nope, no way, and fat chance.

Categories: Taxation

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