13 of the Craziest Tax Deductions Ever Claimed
Only two things are for certain: death and taxes. But at least with taxes, you can claim deductions. And that's where the fun begins...
Income from illegal activities
In 1931, American gangster Al Capone, who’d previously evaded conviction for countless violent crimes, was finally convicted of tax evasion. If he had a better lawyer, it’s possible he could have gotten away with that too, based on a loophole in the Tax Code taxing only income made from “lawful businesses.” In 1927, a lesser known criminal actually tried to claim paying taxes on illegally-earned income would violate his Fifth Amendment right to not incriminate himself (because if he paid taxes on illegal activities, he’d be admitting to those activities). Here’s your guide to the new tax deductions available as a result of the Tax Cuts and Jobs Act of 2018.
Legal fees…for illegal businesses
The tax code allows taxpayers to deduct all “ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.” On that basis, a taxpayer is permitted to deduct his legal fees from the income he earned from an illegal business, as long as the legal fees were incurred directly as a result of his illegal business. And that’s precisely what happened in the 1966 case, U.S. v. Tellier, in which the U.S. Supreme Court noted the purpose of the tax code is to tax income, not punish illegal behavior.
Fees defending your tax evasion case
Know how you can deduct your legal fees in defending yourself from a crime? Well, that could very well include the crime of not paying your taxes, according to Turbo Tax. Our advice? Don’t try this at home… or without the advice of a very competent attorney. Here’s everything tax experts wish you knew about the Tax Cuts and Jobs Act.
Although you can deduct your legal fees in defending yourself from a crime, you can’t deduct fees that were illegally paid in the first place, such as hiring a hit man to murder someone or hiring an arsonist to burn your business to the ground in order to get insurance benefits. The latter case actually happened, according to Turbo Tax. Drawing a hard line, the IRS said “no” to that (as did the insurance company).
Legit fees from an illegal business
In one head-scratcher of a case, a drug-cooking meth-dealer was permitted to deduct the loss of his drug lab when it…exploded, according to The Motley Fool. Guess what made the difference here was the lack of… arson? Please don’t make these 14 tax mistakes, which could cost you big bucks.
“Alternative” medical expenses
A New York lawyer tried to write off over $110,000 he spent on prostitutes, according to Gen X Finance, claiming they were part of his medical treatment for osteoarthritis. No, said the IRS, on the basis of prostitution being illegal in his state (New York). But it might be worth noting here that while the IRS frowns upon deducting (as a medical expense), the fees charged illegally by prostitutes, the IRS requires the prostitutes to pay taxes on the fees they earn.
But your swimming pool is a legit medical expense
In Cherry v. Commissioner, a taxpayer was permitted to deduct the cost of installing and maintaining his swimming pool because he successfully argued the primary purpose of the pool was medical care for his emphysema (his doctor had told him to get more exercise). His deduction even covered part of the cost of heating the pool, pool chemicals, and a proportionate part of insuring the pool area, according to Forbes. Find out what your tax accountant won’t tell you for free.
Fido’s moving expenses
The tax code permits you to deduct your moving expenses under certain circumstances when you’re moving for the purpose of changing jobs, and according to Forbes, you can even deduct your pet’s moving expenses. But as we’ll see below, don’t try this if your employer reimbursed you for your moving expenses!
Expenses someone else paid
The tax code permits you to deduct up to $2,500 in interest paid each year on a Sallie Mae student loan… if you actually were the one who took and paid the student loan. Apparently, not everyone understands this. A CPA told Money Wise of the new college graduate who sought to take the Sallie Mae deduction…despite that her parents had fully paid her college tuition. Here’s what you need to know about filing your taxes after a big life change.
Feeding and dressing your model child
A photographer tried to deduct the costs of feeding and clothing her child, claiming it as a business expense because she sometimes used her child as a model in her business. The IRS said, “nope,” according to Gen X Finance, allowing the photographer to deduct only the price of outfits the child wore in photographs for which the photographer was paid.
The cost of your “uniform”
In contrast to the photographer’s child’s clothing costs, actual work uniforms are tax-deductible. But to qualify, the uniform must be a required condition of employment and must not be suitable for everyday use. On that basis, a stripper was allowed to deduct the cost of her breast augmentation in the 1990s, according to The Motley Fool. Here are 13 secrets an IRS agent wouldn’t want to tell you about tax planning.
Your “business” isn’t necessarily the IRS’s “business”
Just as breast augmentation could be deductible for strippers, so can pole dancing classes. However, unless you’re a stripper, don’t try this at home. The IRS flat-out refused to allow a businessman to deduct his the cost of his wife’s pole dancing classes, despite that he claimed them as an “entertainment expense” for his business.
Too much fun to be deductible
St. Louis CPA Joe Eckelkamp tells the story to Money Wise of the farmer who wanted to deduct the cost of his ATV. He claimed he used it to “check the fence lines” on his property. To Eckelkamp, off-roading seemed just a little too “fun” to not raise red flags with the IRS. Deduction: denied. Next, find out the secrets your tax planner won’t tell you for free.