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.