Editor's Note: This article is part of our 2014 Tax Tips series. Robert Flach is an expert with more than 40 years of experience as a tax professional and also blogs as The Wandering Tax Pro.
NEW YORK (MainStreet) In today's Tax Tip, I am going to tell you the answer to just about every tax question you could possibly think of.
The answer is this it depends.
Even tax questions you would think had a definite "yes" or "no" answer do not. It depends.
The only tax question I know for which the answer is a definite "no" every time is: "Should I cheat on my taxes?"
Whether or not a specific item is taxable, deductible or eligible for a credit depends on the specific facts and circumstances of the individual situation.
Can I deduct my cat or dog? I am often asked this question, usually in jest. One would think the obvious answer is "no" (and certainly not as a "dependent"). But what about the owners of the cat who plays Morris in TV commercials, and Moose, the dog who played Eddie on "Fraiser"? And pet breeders who sell the purebred offsprings of their pets, or, as with horses, charge a "stud" fee for mating with another purebred? The animals generate business income for their owners, and so related ordinary and necessary expenses are deductible.
A business deduction has been allowed for cat food used by a scrapyard owner to attract wild cats who would chase away mice and snakes from the yard, and for the costs of guard dogs.
Did you know you can deduct the cost of moving the family pet to a new home, if the move is job-related and meets certain tests?
The IRS tells us
"You can include in medical expenses the costs of buying, training, and maintaining a guide dog or other service animal to assist a visually impaired or hearing-impaired person, or a person with other physical disabilities. In general, this includes any costs, such as food, grooming, and veterinary care, incurred in maintaining the health and vitality of the service animal so that it may perform its duties."
Is interest on state and local government bonds taxable? They are referred to as "tax-exempt bonds," aren't they?
But tax-exempt income from state and local municipal bonds and municipal bond funds is included in the calculation of the taxable portion of Social Security and Railroad Retirement benefits. In certain situations, every $1.00 in tax-free bond interest can result in an additional 85 cents of taxable income!
And tax-exempt income from certain "private activity bonds" is considered a "tax-preference" for purposes of calculating the dreaded Alternative Minimum Tax (AMT). If you are a victim of the AMT, the interest from these bonds is taxed at a rate of 26% or 28%.
Can I deduct commuting? The usual answer is no. But the Tax Court has decided that transportation costs to and from work are allowed as a medical deduction if the employment itself was explicitly prescribed as therapy to treat a medical condition. And you can deduct travel between home and a temporary work location that is outside of the "metropolitan area" where you live and work if the job is expected to and actually does last for one year or less
Can I deduct the cost of a wig? You can if it is prescribed by a doctor for your mental health when hair loss was caused by a disease or accident. And many years ago we had a client who we called the "wig lady." She was an undercover store detective who posed as a shopper to catch shoplifters, and often wore disguises in the course of her work including wigs.
Can I deduct clarinet lessons? You can deduct both the clarinet and the lessons if prescribed by a doctor or dentist to help correct an overbite. And a professional clarinet player can deduct ongoing lessons.
Most "Can I deduct?" questions require that I first ask either "Can you itemize?" or "Do you use it for business?"
Under the "Can you itemize?" category, whether or not you can deduct mortgage interest depends on the nature of the mortgage (acquisition debt or home equity), the amount of the loan principal, the purpose of the loan and the number of personal properties you own.
The answer to "Can I deduct my real estate taxes?" is not always yes. It depends on whether or not you actually own the property and are liable for the taxes. However, there have been occasions where a person whose name was not on the title could deduct the taxes (i.e. a married couple live in and pay all the bills, including mortgage and taxes, for a home whose title is in the name of the husband's parents).
Can I deduct charitable contributions now depends on whether you have the proper documentation as well as to whom the contributions are made.
And medical or miscellaneous investment and job-related expenses are only deductible, if you can itemize, to the extent they exceed a percentage of your Adjusted Gross Income.
So, can you deduct dry cleaning? It depends!
--Written by Robert D. Flach for MainStreet