3 best tax deductions to target and 3 to avoid

This article was fact-checked by our editors and Christina Taylor, MBA, senior manager of tax operations for Credit Karma.

You may consider being a little loose with the truth when reporting your deductions on your federal income tax return. The temptation can be even greater if you’re self-employed or run a business, and every expense counts.

But if you try fudging deductions and get caught, you could be on the hook for a steep penalty, and even prison if you did it on purpose.

Knowing the tax deductions you’re actually eligible for can help ensure that you maximize any refund you’re owed while avoiding trouble with the IRS. In that spirit, here are three tax deductions you should think twice before taking, and the three best tax deductions that you might not have thought of.

• 3 tax deductions you might want to avoid
• 3 best deductions that might surprise you
• A bonus reminder of an under-used credit

3 tax deductions you might want to avoid

While some of these deductions are outright false, others are misconceptions that are close to the truth.

1. Meals

If you’re a self-employed business owner, you might consider any expense you incur for your business to be deductible, including your lunch takeout. Unfortunately, that’s not the case.

“The IRS only allows you to deduct meals when it’s directly related to discussing business matters with clients or business partners,” says Aaron Lesher, CPA and head of customer success at Hurdlr, an app that helps you maximize your tax deductions. “Even then, generally only 50% of the total meal cost is deductible.”

What are my chances of getting audited by the IRS?

Typically, the IRS audits less than 1% of all tax returns filed in a fiscal year. For example, the IRS audited only 0.7% of all individual income tax returns from the 2015 tax year. But don’t let that make you overconfident. The best thing you can do is be honest. 

2. Home-based business expenses

If you’re self-employed, the IRS does allow you to deduct some expenses for your home-based business, but it’s easy to get carried away.

“While you may work at home, you need to make sure that your space passes the home office test,” says Abby Eisenkraft, an enrolled agent and CEO of Choice Tax Solutions.

This means you must have a space in the home that you use regularly and exclusively for your business. So if your “home office” is a desk in your dining room where your family regularly eats meals, your workspace may not qualify for the home office deduction. Also, your house must be your main place of business.

“If your space passes the test and you are self-employed, you can write off a portion of your rent and expenses based on the size of your office versus the entire space,” says Eisenkraft.

3. Your pet

Yes, you might consider your cat as a member of the family. You might even have pets instead of children. But that affection doesn’t carry much weight with the IRS, so don’t try to claim your pet as a dependent on your tax returns. Pets don’t meet the very first criterion for qualifying as a dependent: Dependents must be a person.

That said, there are some pet-related expenses you might be able to deduct. For example, if you’re active-duty military and move for work, you may be able to deduct the cost of shipping your pets to your new home. And if your pet is a service animal, you may be able to deduct the costs of buying, training and maintaining the pet.

3 best tax deductions that might surprise you

Sure, it would be great if you could deduct pet care and every meal you ate at your desk while working through lunch. But you might be surprised to learn some often-overlooked deductions that are actually legit. Here are three.

1. Sales tax

You can choose to deduct sales tax that you paid throughout the year instead of state and local income taxes. This is especially helpful if you live in a state that doesn’t levy a state income tax or you made some big-ticket purchases during the year.

But while you just have to look at your state tax return to figure how much you paid in state and local income taxes, deducting sales tax requires that you keep all your receipts to make sure the numbers are right. And as of the 2018 tax year, the federal deduction for state and local taxes is capped at $10,000.

2. Mortgage points

If you bought a house during the year, you might have paid money, often called “points,” to reduce the interest rate on your mortgage loan.

The IRS considers these mortgage points as prepaid interest, so if you itemize your deductions and include the interest on your mortgage, you can also likely include the amount you paid in points. Learn more about whether your mortgage points are deductible at the IRS website.

3. Gambling losses

No one likes to talk about how much they lost in Vegas or Atlantic City. But when it comes to filing your tax return, it can pay to be honest.

To qualify for this deduction, you must itemize your deductions and keep a record of your gambling winnings and losses. You also can’t claim more losses than the amount of gambling income you report on your return.

A bonus reminder of an under-used credit

While it’s a credit rather than a deduction, the Earned Income Tax Credit is one the IRS says often gets overlooked.

One out of every five workers who are eligible to get the credit don’t claim it, the IRS says. The credit is designed to help moderate- and low-income earners. You can check the IRS’ EITC income limits for the tax year to see if you might be eligible for the credit. Or you can use a tax software, which auto-calculates this credit for you, so there’s no chance you’ll miss out on it.

Bottom line

As you prepare to file your tax return, it’s critical to include only those deductions that you qualify for and to report them accurately. Deducting something that you’re not supposed to, or overstating a deduction amount, can raise a red flag with the IRS and potentially cause problems if the IRS chooses to audit your return.

You can learn more about the different deductions you may qualify for on the IRS website.

Christina Taylor is senior manager of tax operations for Credit Karma. She has more than a dozen years of experience in tax, accounting and business operations. Christina founded her own accounting consultancy and managed it for more than six years. She co-developed an online DIY tax-preparation product, serving as chief operating officer for seven years. She is an Enrolled Agent, the current treasurer of the National Association of Computerized Tax Processors and holds a bachelor’s in business administration/accounting from Baker College and an MBA from Meredith College. You can find her on LinkedIn.