As a CPA, EA, or other tax professional, your clients look to you for guidance when it comes to maximizing their deductions. They want to save as much on their annual tax bill as they can manage, and they trust that you’ll do everything you can to help them achieve that goal. Historically, itemized deductions have amounted to significant (sometimes huge) savings for individual filers. In December of 2017, however, Congress passed the biggest tax reform bill in decades. While the 1,100+ page bill will mean different things for different tax filers–changing tax brackets, pass through income rules, and a wide array of other tax-related items for both individuals and businesses–one thing about the bill immediately stood out to filers in a number of states. Specifically, the bill places a cap on the amount of state and local tax payments that are eligible for deduction from federal taxes owed. This amount is now limited to $10,000 per tax year. As a result, ensuring that other deductions are fully accounted for is more important than ever for a number of taxpayers. That’s why we’ve put together this overview of the various expenditures that can be claimed under the miscellaneous itemized deduction rule.
2% Deduction Rule
According to IRS Publication 529, certain expenses are eligible for deduction on your Schedule A as “miscellaneous itemized deductions.” The amount of these expenses that can be claimed is that which exceeds 2% of a taxpayer’s adjusted gross income (AGI). In other words, a tax filer should total up all qualifying expenses, subtract 2% of their AGI from this amount, and then include the resulting amount on their Form 1040 or Form 1040NR.
Which Expenses Count as Miscellaneous Itemized Deductions?
As the name implies, “miscellaneous” itemized deductions account for an incredibly diverse array of expenses. The list here is meant to be as comprehensive as possible; however, it is not exhaustive.Any of the following expenses that exceed 2% of a taxpayer’s adjusted gross income can be deducted from their income subject to federal income tax. These expenses include:
Unreimbursed Employee Expenses
Business bad debt of an employee
Business liability insurance premiums
Damages paid to a former employer for breach of an employment contract
Depreciation on a computer a taxpayer’s employer requires him to use in his work
Dues to a chamber of commerce if membership helps the taxpayer perform his job
Dues to professional societies
Educator expenses
Home office or part of a taxpayer’s home used regularly and exclusively in the taxpayer’s work
Job search expenses in the taxpayer’s present occupation
Laboratory breakage fees
Legal fees related to the taxpayer’s job or for producing taxable income
Licenses and regulatory fees
Malpractice insurance premiums
Medical examinations required by an employer
Occupational taxes
Passport fees for a business trip
Repayment of an income aid payment received under an employer’s plan
Research expenses of a college professor
Rural mail carriers’ vehicle expenses
Subscriptions to professional journals and trade magazines related to the taxpayer’s work
Tools and supplies used in the taxpayer’s work
Purchase of travel, transportation, meals, entertainment, gifts, and local lodging related to the taxpayer’s work
Union dues and expenses
Work clothes and uniforms if required and not suitable for everyday use
Work-related education
Other Expenses
Appraisal fees for a casualty loss or charitable contribution
Casualty and theft losses from property used in performing services as an employee
Clerical help and office rent in caring for investments
Credit card convenience fees for paying income tax by credit or debit card
Depreciation on home computers used for investments
Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust
Fees to collect interest and dividends
Hobby expenses, but generally not more than hobby income
Indirect miscellaneous deductions from pass-through entities
Investment fees and expenses
Loss on deposits in an insolvent or bankrupt financial institution
Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed
IRA, SEP, SIMPLE or self-employed qualified plan custodial fees paid with funds that are outside of the account
Repayments of income of $3,000 or less
Safe deposit box rental fees, except for storing jewelry and other personal effects;
Service charges on dividend reinvestment plans
Trustee’s fees for an IRA, if separately billed and paid
Trust administration fees
Tax preparation expenses
Undeveloped land management expenses
Unreimbursed expenses attributable to the trade or business of being an employee
Repayments of Social Security benefits
The share of deductible investment expenses from pass-through entities
Keeping Track of Miscellaneous Itemized Deductions
Admittedly, this list is long and varied. Keeping up with each of these expenses can be a hassle for both tax professionals and their clients. However, some of these expenses are quite obvious and easy to calculate. For example, the fees associated with tax preparation are something that a client can count on having from year to year, and these are easy to keep track of.
Specific clients will each have their own set of predictable, recurring expenses that qualify for the miscellaneous itemized deduction. It can be a good idea to sit down with new clients and go through this list early on, identifying any items that they believe will show up for them from year to year. They can then keep track of these expenses separately, and submit them to you at year’s end as their own individual expense category.
Staying Up to Date with the New Tax Bill
Changes to the tax code under the new Tax Cuts and Jobs Act will impact virtually every aspect of tax filing, including all sorts of deductions. The miscellaneous itemized deduction is no different. As a tax professional, it’s important to stay up to date on these changes so that you can provide the best possible tax advice and preparation for each and every one of your clients, whether they’re filing as an individual, a sole proprietor, or a corporation. Basics & Beyond™ offers up to date tax CPE webinars with the latest information for tax professionals: click here to learn more.
