I’m writing this for two reasons. One, I’m trying to get back into the swing of writing about things that I find interesting, and two, no one has a clue what they are doing when it comes to taxes.
The topic of consideration today is what you can “deduct” or subtract when figuring out how much you owe, or will hopefully get back in a refund. There are basically two types of expenses that we incur in our daily lives. The normal day-to-day expenses of eating, entertaining, and caring for ourselves, and those expenses that we incur to make money. The government long ago decided that you shouldn’t get a tax advantage for expenses that aren’t incurred in the pursuit of making money (Internal Revenue Code Section 212). So, food, movies, cars, soap, etc., aren’t allowed to be directly deducted for tax purposes. Instead, we get these handy “standard deductions” which automatically reduces the amount of income that we are taxed on. These “standard deductions” range anywhere from $5,700 if you are single to $11,400 if you are married (filing jointly). So that should make sense.
Where things can get a bit dicey is when you have to decide who gets to take the deductions and who can’t take the deductions. For example, I have a teenage cousin who is actively pursuing an acting career. Since she is young and doesn’t have a steady job, the costs of traveling to these auditions and other expenses falls to the parent. This includes gas, hotels, and food. We discussed earlier that you are allowed a deduction if you are in the pursuit of making income, but who exactly gets to take that deduction? The parent incurred the expense, but the daughter is earning the income. Unfortunately, a logical and straightforward answer is not always available when it comes to taxes. It would seem fair to let the mother take the deductions on her tax return since she is bearing the burden for this activity.
Internal Revenue Code section 73(b) states that “All expenditures by the parent or the child attributable to amounts which are includible in the gross income of the child (and not of the parent) solely by reason of subsection (a) shall be treated as paid or incurred by the child.” Fortunately, this law is fairly straightforward. The IRS requires that the child take these expenses and pair them with the income that is earned. This is due to a very important set of doctrines and precedent which have been created over the years regarding who is to be taxed on income. The courts have decided that the person who earns the income (works for it at a job or in a similar manner) be required to pay taxes on that income. Even if the daughter gives all the income from acting to the mother, the mother didn’t earn it and will not be taxed on it. Because the daughter is the only one who is taxed on the income, she is the only one that is allowed to take the expense deductions.
While this was a very specific example, it is something that you can extrapolate to other circumstances in your life. Just keep in mind that the person who EARNS or OWNS the income is the one that must be taxed on that income. It logically follows that this person should be the one that will get to take the deductions to lower the amount of tax that they must pay.
Posted by Mike 
