The 9 wackiest tax deductions

By Bankrate.com

Did you hear the one about the instant "nephew"? The $35,000 in dance lessons? The new definition of office paperwork?

That's right, it's time for the fourth installment of Bankrate's wackiest tax deductions, our homage to the endlessly creative ways some taxpayers try to limbo under the tax code.

In our first installment, taxpayers tried to write off everything from sperm donations to an arsonist's fee. Our second installment found clever filers trying to deduct a "love shack," doggie day care and a pimped-out Amish buggy. Round three featured otherwise law-abiding Americans trying to write off a $50,000 wedding as a business expense and claim New York City as a dependent.

This year's best cocktail stories -- culled from certified public accountants nationwide, some of whom requested to remain unidentified -- often come with a disclaimer: Do not try this at home. Or in the home office, for that matter.

• Talk back: Have a wacky tax story to share?

As audacious as these stories might be, rest assured that the Internal Revenue Service is not amused when taxpayers fail to file, misfile, underreport income or otherwise attempt to avoid taxes.

Ready for some laughs? Behold Bankrate's wackiest tax write-offs, the 2009 edition.

1. Paper-thin home office deduction

CPAs sometimes feel they've opened a Pandora's box when they introduce newly self-employed clients to the wonderland of home office deductions: Give 'em an inch and . . . well, you wind up like one Arizona accountant whose client exhibited an unusual amount of tax swagger.

The client asked for a home office deduction for the toilet paper he bought for his house. No word on the nature of his business.

2. Hell hath no fury . . .

Walt Hatter, a CPA at Hatter & Associates in Fort Worth, Texas, has seen some generous taxpayers in his day, but none compares with the woman who gave it virtually all away.

The client, whose income was about $40,000, brought in noncash receipts from donations made to various charities. The donation total came to roughly the same dollar amount as her income.

Hatter was about to nominate her for sainthood -- until he heard the rest of the story.

"She had gotten a divorce; her husband had cheated on her and just never came back," Hatter says. "He called her up and said he would send a moving van to divide their assets. So, she loaded up everything he would want -- two or three sets of golf clubs and all the furniture, including some of his family antiques -- and took it all to Goodwill. She even had photos of all the stuff!"

It fell to Hatter to inform her that she could deduct only up to 50% of her adjusted gross income.

"We wound up with something like $15,000 in contributions," he says. "I just knew that that return was going to get audited, but it never did."

3. At least it wasn't 'travel and entertainment'

Sometimes business owners will try to slide a fast one by the IRS by classifying a business deduction in a category where the dollar signs might not raise an eyebrow.

One such fastball didn't pass the eyebrow test with this Oklahoma accountant, however.

"We were reviewing a business client's accounting entries and noted a check for over $2,000 written to a gynecologist. It was classified on the business books as 'repairs and maintenance.'"

4. Bubble-bath credit

Taxpayers sometimes get into hot water by deducting their spas and swimming pools as medical deductions or, more boldly, as business expenses.

"We had a woman who tried to deduct her tricked-out Jacuzzi hot tub due to medical reasons," says Elizabeth Dittrick of Dittrick and Associates in Burton, Ohio. "That can be a legitimate expense -- but not the underwater speakers, the mood lighting and the in-tub stereo. So we ended up deducting a portion of it but removed the sound and light show. She did use it for medical reasons; she had arthritis and had a note from her doctor."

It was going to be a bit longer swim for one New Jersey accountant's client.

"A taxpayer wanted to write off a $100,000 swimming pool for medical reasons," says the accountant. "Swimming, he explained quite seriously, relaxed him so he could earn more money, which in turn would be taxable."

Uh . . . no.

Continued: Beautify your return

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