Most individual taxpayers are familiar with the choice they can make between the standard deduction and itemized deductions. Most individual taxpayers are also familiar with the most common itemized deductions. These commonly known itemized deductions include expenses such as:
- Medical and dental expenses
- State and local taxes, such as income taxes, real estate taxes, or personal property taxes
- Home mortgage interest
- Charitable contributions
However, there are also a wide variety of other expenses that many taxpayers incur each year that can also be deducted as itemized deductions. The IRS refers to them as "miscellaneous deductions". Since these miscellaneous deductions are less-known and less-often discussed, it’s good to take a closer look at them in order to determine if you could benefit from claiming them.
Here’s a few things you should know about miscellaneous deductions:
Miscellaneous deductions can only be deducted if you elect to itemize deductions. If you claim the standard deduction, miscellaneous deductions cannot be claimed. As a result, based on the amount of miscellaneous deductions you have, you may want to consider itemizing deductions instead of claiming the standard deduction.
Most miscellaneous deductions are subject to a 2% of adjusted gross income floor. For example, if a taxpayers adjusted gross income is $200,000 for a tax year, he can only claim 2%-floor miscellaneous deductions to the extent that their total exceeded $4,000 (2% times $200,000) during the tax year. If he had $3,995 in 2%-floor itemized deductions, his total deductible amount would be $0, since $3,995 is less than $4,000. If he had $4,250 in 2%-limited itemized deductions, his total deductible amount would be $4,250 minus $4,000, or $250.
Unreimbursed employee expenses are one type of 2%-floor miscellaneous deduction. Unreimbursed employee expenses are deductible subject to the 2% of adjusted gross income floor if all of the following are true:
- The expense was paid or incurred during the tax year, and
- It was paid in order to carry on the business of being an employee, and
- It was ordinary and necessary.
Per the IRS, “An expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. An expense doesn't have to be required to be considered necessary.”
A few examples of unreimbursed employee expenses include:
- Professional society or union dues
- Work tools or supplies
- Home office expenses
- Work-related travel
- Work-related transportation, such as auto expenses (however, commuting expenses are generally nondeductible)
Tax preparation fees are another type of 2%-floor miscellaneous deduction. Tax preparation fees paid to CPAs, tax attorneys, or other tax professionals or preparers to for them to prepare your taxes, amounts paid for tax preparation software or books, and amounts paid in order to electronically file your returns are all deductible subject to the 2% of adjusted gross income floor.
Expenses you incurred in order to earn or otherwise receive income are another type of 2%-floor miscellaneous deduction.
These expenses are deductible subject to the 2% of adjusted gross income floor if they were paid for any of the following reasons:
- in order to produce or collect income that must be included in your gross income, or
- in order to manage, conserve, or maintain property held for producing such income, or
- in order to determine, contest, pay, or claim a refund of any tax
A few examples of these “income-related” expenses include:
- Appraisal fees for purposes of evaluating a casualty loss or a charitable contribution
- Investment fees and expenses
- Safe deposit box rental, unless used to store jewelry or personal items
- IRA trustee fees
- Tax advice fees
- Repayments of income or social security benefits
Certain miscellaneous deductions are not subject to the 2% of adjusted gross income floor. That means the full amount of these types of expenses can be deducted as itemized deductions without reducing the deductible amount.
These types of expenses include:
- Amortizable premium on taxable bonds.
- Casualty and theft losses from income-producing property.
- Federal estate tax on income in respect of a decedent.
- Gambling losses up to the amount of gambling winnings.
- Impairment-related work expenses of persons with disabilities.
- Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
- Losses from Ponzi-type investment schemes.
- Repayments of more than $3,000 under a claim of right.
- Unrecovered investment in an annuity.
There are a wide variety of miscellaneous deductions, and many of them are subject to very specific rules. If you have questions about how claiming miscellaneous deductions may benefit you in your specific tax situation, you should contact an Atlanta tax accountant such as Fusion CPA.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided in this website is not all inclusive and such information should not be relied upon as being all inclusive.