Tax time can inspire some creative planning for lowering the tax bill.
About one-third of Americans itemize their deductions, which is where some creative techniques are used, given that itemizing helps lower a filer's tax liability. Higher-earning Americans are more likely to itemize than low-income workers, with 98 percent of households earning more than $1 million annually making the effort, according to an analysis published last year by the Congressional Research Service.
While most of those deductions are for humdrum items such as the home-mortgage interest deduction and state and local taxes, the tax code and court rulings have allowed for leeway in some unusual circumstances. Many of these strategies benefit small business owners, while others provide some relief for the unlucky as well as America's growing ranks of the 1 percent of earners.
These strategies aren't without controversy, given that tax deductions are often cited as benefiting the rich, while leaving the middle-class paying a greater share of their incomes in taxes. Some, including President Obama, have called for narrowing the mortgage interest deduction, while others want to scrap it all together. About $72 billion annually is saved by American taxpayers through that deduction, making it the country's largest.
The following deductions represent only a small share of the more than $200 billion deducted each year by taxpayers, but are fair game for those who have the receipts and documentation to back them up.
A run of bad luck at the casino can turn into a winning strategy at tax time, albeit within limits. Gambling losses can be deducted only up to the amount of gambling winnings. That means that taxpayers can't deduct losses beyond what they've pocketed from games of chance such as lotteries or horse races.
Also be prepared to take careful notes of winnings and losses. The IRS requires gamblers to keep a diary or record of their gambling activities, including who was present at the gambling establishment, the amount won or lost, and the date and type of gambling.
Schlepping Fido across the country can count as a valid deduction for Americans who are are moving because of a new or changed job. There are some limits, however: A move has to be more than 50 miles from the tax payer's prior job and it only applies to full-time employees.
If taxpayers meet those and other requirements, they can deduct the cost of shipping household pets to their new home, according to the IRS.
Home security system
For people who have a home office that's only used for business purposes, a home security system is a deductible expense. But like all home office deductions, there are limits: If the security system is only for the office itself, then it's entirely deductible. But if the security system is for the entire house, taxpayers can only deduct the corresponding proportion of the security system.
The lifestyles of the top 1 percent of American taxpayers can sometimes be underwritten by the help of the tax code. Take the second-home deduction, which is sometimes applied to yachts by creative taxpayers.
The deduction has to be secured by a qualified home, which can include boats as well as recreational vehicles or cabins, according to the IRS. To qualify, the structure needs to have sleeping quarters, a toilet and cooking facilities.
This deduction isn't without controversy. In 2013, U.S. Representatives Mike Quigley (D-Illinois) and Tim Walz (D-Minnesota) introduced a bill that would bar the deduction for boat owners who classify their yachts as second homes. Quigley called the tax break "frivolous," prompting boat manufacturers to orchestrate a letter-writing campaign. In the end, President Obama renewed the tax break late last year.
For all you Captain Ahabs out there, take heart. Some of your expenses might be tax deductible. The catch is that this deduction only qualifies for sanctioned whaling activities, which today mean subsistence bowhead whale hunting activities overseen by the Alaska Eskimo Whaling Commission.
For whaling captains who qualify, the IRS allows deductions of $10,000 annually for costs related to buying and maintaining whaling boats and gear, supplying food for the crew, and storing and distributing the catch.
A taxpayer claimed the deduction after an orthodontist recommended his child take clarinet lessons as a way to treat his crooked bite. According to an IRS bulletin published in the early 1960s, this request was granted, with the agency deciding it was a medical issue. It's not clear if anyone since has tried to claim the deduction, however.
Victims of Ponzi schemes can get some relief thanks to an IRS provision that allows related losses to be deducted. While the agency issued some guidance after investors lost a reported $65 billion in Bernie Madoff's investment scam, this deduction covers anyone who has lost money in a Ponzi scheme.
There are some hoops to jump through before claiming losses from a Ponzi scheme, which are frauds created by managers who pay "profits" by redirecting cash from new investors, rather than through actual investment gains.
To receive the deduction, the Ponzi scheme operator has to have been charged by indictment under state or federal law, while victims must also have been unaware that the scheme was fraudulent before investing.