10 Creative (But Legal) Tax Deductions


Home Office Expenses

Home office, father and son
To avoid being audited, make sure that your home office is used "exclusively and regularly" for your work. Maskot/Getty Images

Before we get too deep into this one, heed this warning: Home office deductions are a huge red flag for the Internal Revenue Service (IRS). The IRS has established a strict set of rules on home office deductions and too many taxpayers try to flaunt them. So unless you have a perverse love of audits, rein in your creativity on this one.

According to the IRS, a portion of following expenses may be deducted for a qualifying home office:

  • Real estate taxes
  • Mortgage interest
  • Utilities (electricity, heat, water, gas, Internet service, telephone service, etc.)
  • Insurance
  • Painting and repairs
  • Depreciation

Instead of itemizing, you can opt for taking a standard deduction of $5 per square foot of home office space, up to 300 square feet.

Again, the IRS is a stickler on this one. A qualifying home office is a part of the home that is used "exclusively and regularly" as the principle place of business [source: IRS]. Ideally, it's a separate structure from the living quarters of the house. If not, then it needs to be a place set aside exclusively for business purposes. People get into trouble when their bedroom doubles as their graphic design studio, or they work from home a couple days a week because the commute is too long [source: Turbotax].

But if you already have a portion of your home set aside exclusively for business purpose, then you have the right to take as many deductions as you deserve. For example, if you regularly meet clients or customers in your home office, you can deduct the cost of repairs and maintenance -- even landscaping -- to the home that make it more presentable [source: TurboTax].

Now let's see how you can save tax dollars by turning your hobby into a small business.