Four decades of practice in the tax field has revealed several patterns. Year after year clients ask if they can deduct items they can’t.
Rarely is a new item added to the list. Can I deduct work clothes? Meals? Travel? Gym Membership? Medical expenses? Health insurance?
Behind every “Thou shalt not deduct” is a hint of deductibility. In taxes nothing is an absolute. The cookie-cutter response to a quick question is the easiest answer to save time and is usually right. But a bit of planning can turn those “no deduction” answers into, “Yes, you may deduct that.”
In this article I will cover 10 things that are not deductible, but can be in certain situations. If you received a pat “no” for an answer in the past and you actually do qualify for a deduction you can amend your tax return to get your money.
Keep in mind qualifying for some deductions is not possible for everyone. And this article is not a guide for playing it fast and loose. The best defense against IRS scrutiny is good tax practices backed by knowledge, information and a solid paper trail.
Let’s start deducting.
10 Things You Can’t Deduct on Your Taxes, Maybe
Gambling losses are not deductible unless you have gambling winnings.
Gambling losses can only be deducted to the extent of gambling winnings.
Gambling losses are reported on Schedule A (the form for itemizing). What if you don’t have enough deductions to itemize? Tough luck! Maybe. Because there is another way out.
To make the matter worse, some states don’t allow any gambling losses, even if itemizing.
But then we have sessions. The IRS has a special way to calculate gambling wins, if you are interested; no itemizing required.
The strategy is called “gambling sessions“. Under a session you can net your wins and losses for that session. A session can be defined by a 24 hour day (not a calendar day) so you are allowed restroom breaks or machine hopping in the hopes of winning more. You can also play past midnight in the same session.
Sessions can eliminate a large portion of your gains with the remainder available, up to your total wins, as an itemized deduction.
A few years back I consulted with an A-list actor. He wanted to deduct a home gym, claiming the gym was necessary to keep his physic at a peak for movie roles. I said no.
BUT. . .
. . . while gym memberships are always a no (with a slight possibility as a medical deduction if required by doctor’s orders and you have enough medical expenses to move the needle), exercise equipment is not “always” a no as I informed my consulting client.
In his case he was an employee of his own loan out corporation. He was also the only employee.
I stand by my answer that he was NOT allowed a deduction for a home gym, even if his corporation was run out of his home. The situation smacked too much as a non-deductible personal expense.
However, exercise equipment can be deductible in a limited situation!
If you have a business with employees you can have an on-premises gym. It must be available to all employees for the equipment expenses to be deductible.
Improvements to income producing real estate will either enjoy a deduction or depreciation (deducting the expense over a number of years).
Improvements to your primary residence, second home, vacation home, cottage, etc is never deductible.
Those expenses might not be lost. If the property is not your principal residence all the gain is taxable when the property is sold. Those improvements add to your basis, thereby, reducing your gain. Keeping a record of improvements to a second home is always a good idea. You never know when the expense will benefit you. Technically not a deduction, these improvements act like one at sale.
If the property was your principal residence for 2 of the past 5 years you qualify for a §121 exclusion. This exclusion allows you to exclude up to $250,000 of gain per person. On a joint return the exclusion is $500,000 is both used the home as their principal residence 2 of the past 5 years.
As generous as §121 is, there are many people who have an even larger gain. This excess gain is taxed, of course. Home improvements add to basis, lowering your gain. For some, this is a powerful tax reducing strategy. All you need to do is keep a record of your home improvements.
Lunch with coworkers are never deductible. Same with meals at home.
But that doesn’t mean meals can never be deducted, even for an employee.
A business owner can deduct meal expenses when traveling with some limitations. Of course, the travel must be business related. Conferences and meeting with clients counts.
What about employees? Well, the Tax Cuts and Jobs Act (TCJA) eliminated the section of Schedule A where unreimbursed employee business expenses went. Still, not all is lost.
You can deduct your expenses for work under an accountable plan. The big issue is that your employer has to cooperate. You can read more about accountable plans with the link in this paragraph.
Child Support and Alimony
This one is a tough nut to crack. Child support is never deductible. Alimony might be.
The TCJA also eliminated the alimony deduction. However, if the divorce instruments are executed after 1984 and before 2019, alimony payments are still deductible.
Note that with taxes every action often is accompanied by an equal, but opposite, reaction. If alimony paid is deductible it is also reportable income for the recipient. If the alimony is not deductible, the recipient does not claim the alimony as income.
Are all expenses to feed and maintain an animal non-deductible? Usually.
It doesn’t take a lot of thought to realize expenses for animals are deductible for farmers. And therein lies the opportunity.
But, I hear you say, my cat or dog is not equivalent to a farmer’s cow. Agreed. But a cow is no more deductible than a cat or dog if it is a personal pet.
What makes the farmer’s cow deductible is that it is part of a business.
You CAN deduct pet expenses when they are part of an income producing activity or for medical need.
Let’s dig a bit deeper into this “income producing activity”.
The activity would need to be a part of your business. (If the expense is work related as an employee you would need an employer with an accountable plan.)
Several business models come to mind: pet grooming, shelter, pet walking and even security guard dogs. Maybe a stretch, but I feel it is allowable, is a vet that has a resident cat.
As you can see, pet expenses are not an automatic no.
Some of the expenses deductible in qualified situations include: vet bills, food, pet insurance, grooming, boarding, training and other ordinary and necessary expenses.
Donations to a Unqualified Charity
Is a donation to a local Little League or school group deductible as a donation to charity? Unless it is a qualified charity the donation is not allowed as a deduction on your tax return.
Yet, once again, there is a workaround and it involves having your own business. (The value of a side business cannot be overestimated. It does need a profit motive, however.)
A business can donate to any charity as a sponsor of an event and deduct the expense as advertising. A personal donation is disregarded for tax purposes, but if you sponsor a Little League or school event the business qualifies for a deduction. The business does need to be recognized by the organization. A listing in the event flyer is common and often news releases by the organization include a mention of sponsors, enough to qualify as a deduction.
A common question from clients: Can I deduct the value of my time for helping at church or for remodeling a rental property I own?
First, how do you arrive at a rate for your time? As a tax accountant my hourly rate reaches toward a thousand dollars. Can I game the system by painting my office and deducting a cool hundred grand?
And neither can you.
This isn’t as bad as it sounds. If you could deduct your time you would then also need to claim the amount as income. Since earned income is taxed more than any other form of income, not claiming the income or deduction is actually a serious tax reduction.
Example: You put $10,000 of your time into repairs at your rental property. You deduct the $10,000 on Schedule E for said property. If you are in the 24% tax bracket you save $2,400 in taxes.
Then you must report the income on Schedule C. Again, you would be taxed at 24%, giving back all the advantage. BUT! You also pay self-employment tax on business income at 15.3%! This would increase your overall tax by ~$1,500 over not claiming your time.
Do you see why you can’t (and shouldn’t) deduct the value of your time now? If not, re-read this section. It is in your best interest not to claim your time as a deduction. That is why we call it sweat equity. And it is the only way your labor is taxed at a lower rate.
Spa Treatments or a Massage
I know the appeal of a good massage and plenty inform me of the benefits of spa treatments. These pleasurable expenses are unfortunately nondeductible. . .
. . . unless your doctor prescribes it for medical reasons. The expense would still need to rise to the thresholds for a medical deduction.
BUT. . . the doctor may order a hot tub for a medical condition so installing a hot tub might actually be a medical deduction.
Obviously these are of limited use as most people will not qualify. But if you do, don’t forget your legal deduction.
Employer-provided health insurance is a tax-free fringe benefit. But what about any health insurance premiums you pay out of pocket?
Deducting health insurance on Schedule A is very limited. First you subtract 7½% of your AGI before any counts and then you need enough itemized expenses to itemize before it matters.
Don’t forget your state tax return.!
In Wisconsin, for example, medical care insurance, long-term care insurance and Medicare premiums paid are deductible above the line, no itemizing required.
While the answer to this section is short it brings out an important part of taxes: state tax returns. All too often the state tax return is treated as an afterthought. That is a mistake. Serious tax savings are possible when a close eye is kept on the state side of the tax return.
Another area where the state tax return has an advantage is with ABLE accounts and 529 plans.
This list is not all-inclusive. With taxes there are almost always exceptions to every nondeductible expense. If you qualify, you owe it to yourself, your family and community, to keep the money in your pocket.
Tuesday 28th of March 2023
This article hit home (and btw what are you doing writing articles, aren't we at the peak of tax season? But I'm sure glad you did. I just spent an hour digging out receipts and looking at old spreadsheets for when I bought my home. It's appreciated at least 60k since I bought, and I had renovations done, lots of little repair jobs, new HVAC... and I'll be here another ten years. Thanks for the tip to put all the receipts and records in one place so I can add those improvements to the basis when I sell it! I'm starting a list for this weekend because it's going to take quite a bit more work to get everything organized, but it'll be a darn lot easier now than it will ten years from now.
Keith Taxguy, EA
Wednesday 29th of March 2023
The goal was to help people in your situation. By getting receipts in order now you save $ later.
As for writing during tax season. I write every day. Some in my journal, notes at the office and so forth. Also read three books this tax season. Less than non-tax season, but still keeping the mind active. I encourage people to take time for themselves, even when the pressure is on. That is why I hit the gym three times a week during tax season. Sometimes you get more work done when you give the body and mind a break.
Tuesday 28th of March 2023
I live in Wi and I couldn't claim medicare or other medical deductions per HR Block state program because our MFJ standard deduction exceed my 13K itemized deduction for Medicare, cobra etc.
Keith Taxguy, EA
Tuesday 28th of March 2023
AJS, Block program is wrong.
Medicare premiums you pay and health insurance premiums you pay are deductible irrespective of itemizing in WI. Goes on Schedule SB, Line 6 (see attached). BTW, COBRA health insurance payments get the same treatment.
My software actually handles it well. I enter health insurance premiums, long-term care and actual medical expenses on separate lines. These flow automatically to the right place on the WI return. The Medicare premiums usually come through the Social Security 1099-SSA. Again, my software does most of the heavy lifting. I am unfamiliar with Block software.