How to 'Cheat' on Your Taxes ... Legally!

Legal tax cheats
Legal tax cheats

It's not even April yet, but there's already tension in the air. Tax Day is almost here, carrying with it the yearly tradition of cursing the government, searching out every possible deduction and finally, grimly writing a check to the IRS.

Politics aside, nobody likes sending money to Washington: In fact, the government loses an estimated $450 billion per year to tax cheaters. And, even though most of us pay our taxes on time and in full, few of us don't occasionally consider how we could bring down the bill with a little ... coloring outside the lines.

With that in mind, here are a few of our favorite tax "cheats" -- deductions that might seem to be a little outside the bounds, but are totally legal. If you're not taking advantage of these nice little tax breaks, it might be time to have a talk with your accountant. As for us, we met with Jeff Spengler and Paul Block, accountants with Parente Beard, one of the country's top accounting firms, to figure out exactly where the line is between cheating and getting the money you deserve!

Healthy Deductions

It's no secret that many health care expenses are tax deductible, but most people aren't aware of just how far those deductions can go. For example, you may be able to deduct the cost of your health club membership if you have a health condition -- like high blood pressure, back pain, or excess weight -- that can be improved by your time on the treadmill. If you're going to the gym anyway, schedule a talk with your doctor and see if you can get him to help out with your taxes.

Spengler and Block stressed that documentation is key to claiming this deduction. If you can get your doctor to write you a note outlining your condition and explaining exactly why the health club membership is required, you should be home free. One warning, though: Expenses for entertainment are a no-go, so make sure that your doctor is very explicit when he points out how a spin class can improve your blood pressure.

Beyond the health club membership, there are a few grayer deductions that you may be able to take. For example, massage, acupuncture and other luxury health care treatments could also be deductible, as long as your doctor will document that they've been prescribed for therapeutic treatment. And, Spengler and Block were quick to note, hot tubs and steam showers could conceivably be deducted if combined with other therapies and prescribed by a doctor.

Keep in mind, though, that all of these deductions require extensive documentation. When in doubt, consult with an accountant and your physicians; after all, you don't want your acupuncture claim to leave you sitting on pins and needles!

Home Cheap Home

Speaking of home improvements, you can also get a tax break for alterations that make your home more energy efficient. Virginia Watson, marketing director for Dagher Engineering, notes that this break, the Energy Efficiency Tax Credit, "can be claimed by owners who replace or upgrade portions of their house's envelope. If they improve the windows, walls, roof, insulation, siding -- basically any part of the home that touches the outside air, they can claim some portion on their taxes."

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And that's not all: If you switch out your water heater or air conditioning system for a more efficient model, you might be able to take the credit. On the bright side, this deduction is still available for 2011. Unfortunately, though, you can only take it for one year, which means that if you applied for it in 2006, 2007, 2009 or 2010, you're out of luck.

But even if you've already used the Energy Efficiency Tax Credit, you have a few other options for home improvement tax breaks. For example, if you install fuel cells, solar cells, geothermal systems, or solar hot water heaters, you may be able to claim a deduction of up to 30% of the total installation price.

Home improvements can even be a money maker: Watson notes that, if you produce more electricity than you use, you can often sell it back to the electrical grid. To sweeten the pot, the federal government doesn't tax this income, so if your fuel cells, solar cells and geothermal system leave you with more electricity than you need, you might find yourself running a tax-free business!

Good for Your Community...and Good for You

Everybody knows that you can claim a deduction for the clothes that you drop off at Goodwill or the Salvation Army, but did you know that you can also claim the cost of the gas that you spent carting them over? Whenever you drive somewhere to perform a voluntary activity, you can claim the standard mileage rate for deductions, which is 14 cents per mile.

In fact, while you probably aren't thinking about taxes when you do volunteer work, it's actually a great time to hold onto your receipts. You can deduct the money you spend on food, drinks, and other expenses: They qualify as non-cash contributions. However, Spengler and Block are quick to point out that you should probably hold off on claiming lunch at the Four Seasons: Your deductions need to be reasonable, and should reflect the market rate.

And while we're talking about deducting money for donations, it's worth thinking for a moment about the actual amount that you can claim. All too often, people undervalue their gifts to thrift stores and clothing bank, but -- as Spengler and Block note -- most charitable groups like Goodwill and the Salvation Army publish guides that offer both a high- and low-end value for most donations. In all likelihood, your stuff was worth more than you think. What's more, if you bought a donation right before an event, you can deduct the full purchase price. Spengler and Block stress, however, that you'll need some form of substantiation, such as a receipt, to establish the full value. One easy rule of thumb: You can deduct the resale price of an item.

Nothing can transform preparing your income taxes into a fun activity. But finding all the little breaks that you have coming to you can be rewarding -- both emotionally and financially. Good luck, and happy hunting!

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at@bruce1971.

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