Everyone wants more deductions when it comes to taxes, right? If you own a home, make charitable contributions, pay state income taxes or have medical expenses, then chances are you already itemize rather than take the “standard deduction”. The “standard deduction” is an amount taxpayers are allowed to deduct based on their filing status. If your potential itemized deductions exceed the “standard deduction”, then you can deduct more than the allowed standard deduction.
As we mentioned, the largest potential itemized deductions include, medical expenses, home mortgage interest, state and local taxes and charitable contributions. But there are other potential miscellaneous itemized deductions.
First, you should understand that when it comes to deductions, often there are thresholds to meet before the allowable items become deductible. In the case of most miscellaneous deductions, that threshold is 2% of your adjusted gross income or AGI. You are able to deduct these miscellaneous itemized deductions to the extent they exceed 2% of your AGI. Note that since it is an itemized deduction, it can only be claimed if you itemize your deductions and don't claim the standard deduction.
For example, a taxpayer with AGI of $75,000 has miscellaneous itemized deductions total $2,000. If he itemizes deductions, he can claim a $500 deduction for his miscellaneous items: $2,000 − $1,500 (2% of $75,000).
What are miscellaneous itemized deductions?
The following are itemized deductions subject, in total, to the 2% rule described above:
1. Tax return preparation costs including the fees to have your tax return prepared as well as other costs related to determining your taxes, such as appraisal costs or legal fees.
2. Employment-related expenses of an employee other than those reimbursed under an arrangement that meets special requirements. If you incur deductible expenses in connection with your employment, they are miscellaneous deduction items. These include out-of-pocket expenses for which you aren't reimbursed by your employer.
Expenses for which you are reimbursed or are paid an expense allowance but not under an arrangement that meets specific requirements requires that you include the reimbursements or allowances in income and then separately deduct the expense as a miscellaneous itemized deduction.
If your employer’s arrangement meets the requirements, the reimbursement or allowance isn't included in income and the expense isn't deducted. To meet the requirements the arrangement must require you to give a detailed account of your expenses to your employer and to return any excess allowance amounts you received over the expenses incurred.
3. Investment expenses, and expenses of producing or collecting taxable income. This category includes investment advisor's fees, investment publications, and the cost of a safe deposit box.
4. Hobby expenses. Expenses related to an activity that is a mere "hobby" (not a trade or business) are only deductible up to the extent of your income from the activity. You are taxed on the income and then only separately deduct the related expenses as miscellaneous itemized deductions.
Taxpayers with a relatively high AGI are often limited when it comes to miscellaneous itemized deductions and if you are subject to alternative minimum tax (AMT), the miscellaneous itemized deductions are not allowed for the AMT calculation.
When it comes to itemized deductions, many taxpayers take extra effort to track and report expenses when preparing information to provide to their tax profession. In some cases, taxpayers cannot itemize on their federal return, but benefit from itemized deductions on their state returns. You should discuss the need to track these potential deductions with your tax professional before taking the time and effort. If you clearly cannot itemize, save yourself the trouble.