What You Can and Can’t Deduct
Most taxpayers are very familiar with itemized deductions related to home ownership, medical expenses and charitable donations. But many are less familiar with miscellaneous itemized deductions. If, for example, you must belong to a trade or professional association to carry out your job responsibilities, yet your employer doesn’t cover the dues, you may be able to deduct the amount on your tax return. This is just one of a number of available miscellaneous itemized deductions.
Miscellaneous itemized deductions are divided into two broad categories. The first includes those that can be deducted to the extent the total exceeds 2% of your adjusted gross income (AGI). The other group, not surprisingly, consists of deductions that aren’t subject to the 2% floor. Do you know what miscellaneous expenses you can deduct — and what you can’t?
Deductions Subject to the 2% Floor
The IRS further classifies deductions subject to the 2% floor into three groups. One is unreimbursed employee expenses. To qualify for the deduction, the expenses must be ordinary and necessary, such as business liability insurance premiums and dues to chambers of commerce, trade and professional associations or civic organizations.
Home office expenses, such as telecommunication services, can also qualify, so long as the space is used regularly and exclusively for work and is a requirement of your employment. (Self-employed taxpayers can deduct qualified home office expenses directly from their self-employment income; the expenses aren’t treated as a miscellaneous itemized deduction and thus aren’t subject to the 2% floor.)
The second group of expenses subject to the 2% floor consists of fees for tax preparation and tax advice. You can deduct these expenses for the year in which you pay them. So, on your 2014 return, you can deduct fees paid in 2014 for preparing your 2013 return. This can include the costs of tax preparation software as well as any charges for filing your return electronically.
The third group that’s subject to the 2% floor includes a variety of “other expenses.” Among them are:
- Expenses you might have incurred to produce or collect the income that’s included in your gross income,
- Costs incurred to determine, contest, pay or claim a refund of any tax,
- The cost of any help — whether professional or clerical — needed to care for your investments, and
- Any fees you were charged to collect interest and dividends.
Keep in mind that you’ll need to keep track of such expenses in order to get a deduction on your tax return.
What’s Not Subject to the 2% Rule
There’s a range of expenses that can be taken as miscellaneous itemized deductions regardless of whether they exceed 2% of your AGI. These expenses can include casualty and theft losses from income-producing properties, such as stocks, bonds, works of art and vacant lots.
They also include the federal estate tax attributable to “income in respect of a decedent.” This is gross income a deceased person would have received if he or she hadn’t passed away and that you, as a beneficiary, include in your gross income.
Expenses That Can’t Be Deducted
Some expenses that you might think would qualify as miscellaneous itemized deductions actually don’t, such as:
- Adoption expenses,
- Brokers’ commissions,
- Burial or funeral expenses,
- Commuting expenses,
- The cost of meals eaten while working late or with co-workers,
- Personal legal expenses, and
- Professional accreditation fees.
Some of these expenses may, however, make you eligible for other tax benefits. For instance, adoption expenses may qualify for a tax credit.
The Best Source for Guidance
Determining which miscellaneous expenses are deductible and which aren’t can get confusing. For instance, license and regulatory fees you pay to state and local governments for your trade, business or profession are deductible, subject to the 2% limit. However, professional accreditation fees, such as bar exam fees paid to secure initial admittance to the bar, aren’t deductible.
Your tax advisor is the best source for guidance on what miscellaneous itemized deductions you may be eligible for.
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