Red Flags on Income Tax Deductions

While IRS rules allow for plenty of tax deductions, IRS auditors have observed a pattern of abuse of some deductions over the years. If you claim these deductions, your tax return has a higher chance of being audited. Claim them only if you are sure you can substantiate your claim with proper documentation in the event your return is subject to an audit.

Charitable Deductions

If you give a high amount of your income to charity, your risk of an audit increases. You can take a deduction for all contributions that you make, including non-cash contributions, but make sure you have the receipts to prove each donation. You must attach IRS Form 8283 for each non-cash donation over $5,000, and you need to have valuable property appraised to determine its proper value as a deductible donation.

Car and Home Office

When you use your car for business, keep accurate records of the number of miles you drive regardless of whether you use the IRS standard rate or your actual driving expenses. If you really do use a car for business only, be prepared to prove it. Likewise, make sure you can prove your home office really is your place of business and that it is used only for business purposes. Consult IRS Publication 587 (see Resources) for additional rules concerning home offices, such as how to figure depreciation and how to deduct business furniture and equipment in a home office.

Other Business Expenses

Meals, travel and entertainment are tax-deductible if you own a business or you spend your own money on them as part of your job. Just make sure you can prove every deduction you take was actually connected to your work, as personal expenses of this type are not deductible. If you deduct small business losses or expenses, the IRS will want proof that the losses stemmed from an actual business and not personal or hobby activities.

Real Estate Deductions

Rental losses are tax-deductible, but the rules regarding these deductions are strict. You can deduct up to $25,000 of rental loss based on adjusted gross income up to $100,000, but if your adjusted gross income is $150,000 or more, the deduction no longer applies. Only bona fide real estate professionals can write off all rental losses. However, you must prove you spend more than 750 hours a year and more than half your time working with your property. If real estate is a side business for you, don't deduct more than the maximum rental losses allowed for your income level.