I've generally taken the position that there's nothing you can't deduct, given the right facts and circumstances. But there are certain so-called deductions that permeate the penumbrae of the tax industry that even I can't buy into.
For example, when the Internal Revenue Service started requiring Social Security numbers for dependents, millions of dependents disappeared. No, you can't deduct your dogs and cats on your tax return! And your fish won't fly either.
Here are 10 more so-called deductions that will get you in a lot of trouble if you try to claim them:
1. Advertise on a car, deduct the car
I hear about this one all the time.However, putting the name of your business on your car doesn't allow you to deduct all of your vehicle expenses. It might not even allow you to deduct all of the paint you used, although you'd have a good argument to do so.
What can you deduct for your car? Either business, charitable and medical miles or the percentage of total expenses used for business, based on total miles. So, if you drove the car 10,000 miles and had 6,000 business miles, 60% of your total expenses would be allowable.
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2. Life insurance premiums
Life insurance premiums are not deductible as medical or investment expenses.Because the proceeds of a policy come to the beneficiary tax-free, there's no deduction for any premiums paid.
3. Brokers' commissions
They're not deductible as an investment expense either.If you're the buyer, the commission is added to your cost. If you're the seller, it reduces the amount received. The amount reported as sales proceeds to you and the IRS is normally net of commissions.
4. Tax and insurance reserves
When you buy a house, your lender may require you to set up a reserve at the closing for property taxes and homeowners insurance.The theory is you're advancing money to the lender bank or mortgage company so that when the actual bills come in, there are dollars for the lender to pay them. What you're really doing is giving your lender some interest-free cash so it can make even more money.
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Nonetheless, these reserves are not deductible. You get the deduction for any taxes paid only when the lender pays the bill. You'll get an annual Form 1098 that should tell you how much to deduct in interest and taxes.
The homeowners insurance is not deductible unless the property is used for business or is a rental.
Continued: Homeowners association fees
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