No, you can't deduct your clothing purchases, cell phone bills, or your Sports Illustrated subscription...wait. Actually you can, but only if you know how.
Helping friends and family members prepare their tax returns, financial planner Paul Jacobs, CFP, with Palisades Hudson Financial Group, has heard everything.
â€œYou name it, Iâ€™ve had people ask me if they can deduct it,â€ says Jacobs, who is based in the firmâ€™s Atlanta office and holds the IRSâ€™s Enrolled Agent designation.
â€œSome friends want to deduct clothes; others, magazine subscriptions. They all want to deduct their cell phone bills,â€ he says.Â â€œWhen I ask if the expense is business-related, they mumble something about how â€˜itâ€™s all semantics.â€™ When I tell them that I wonâ€™t put a personal expense on their tax return, they pout.â€
Some ask how much they can report for charitable deductions without the IRS questioning it. Jacobs replies, â€œYou can deduct the amount you actually gave to charity.â€
Self-employed people get huffy when they learn that besides paying income tax they have to pay taxes for Social Security and Medicare.
People tell Jacobs that heâ€™s a great tax preparer if they have a refund coming. â€œI try to explain to them that by overpaying originally and then getting a refund, they actually gave the government an interest-free loan,â€ he says. â€œThey roll their eyes.â€
If they owe the government, they wonder if he knows what heâ€™s doing.
Odd and not-so-odd things you can deduct
But some people can take unusual deductions, Jacobs says. If youâ€™re self-employed, even part-time, and file Schedule C, you can deduct all legitimate business expensesâ€”like business-related cell-phone bills. You probably can deduct your subscription to, say, Sports Illustrated if you have a sports-promotion business.Â Â
Did you install energy-efficient windows, a solar energy system, or a geothermal heat pump in your home last year? You may be eligible for a nice tax credit. Ditto if you bought a house for the first time.
Be sure your tax preparer is competent
Almost 60 percent of taxpayers pay someone else to do their taxes. But anyone can offer his or her services as a tax preparer, no questions asked.
â€œWeâ€™ve all heard horror stories of unqualified tax preparers making costly mistakes with peopleâ€™s tax returns,â€ Jacobs says. â€œFor every tax preparer like me, who says, â€˜You cannot deduct that,â€™ there are other tax preparers who will say, â€˜No problem.â€™Â But if you get audited, it can be a big problem.â€
Preparers who hold the CPA or enrolled agent designation are normally safe bets. If your preparer doesnâ€™t have one of these credentials, ask a lot of questions, he says.
Palisades Hudson Financial Group is a fee-only financial planning firm headquartered in Scarsdale, NY. It offers estate planning, insurance consulting, trust planning, cross-border planning, business valuation, family office and business management, executive financial planning, and tax services. Its sister firm, Palisades Hudson Asset Management, is an independent investment advisor with about $950 million under management. Branch offices are in Atlanta and Ft. Lauderdale.