What are Miscellaneous Deductions? by Dustin Grizzle
Posted on November 08, 2017 by Dustin Grizzle
Miscellaneous deductions are tax breaks that can help individuals reduce the amount of income that is subject to taxes. They typically include unreimbursed expenses for items effectively connected with a U.S. trade or business that do not fit into specific tax categories. Examples include, but are not limited to, licensing fees; dues paid to unions, professional associations or chambers of commerce; costs for business travel, entertainment and uniforms; business liability insurance premiums; legal fees related to one’s job; and/or costs paid to prepare a tax return.
The list of potential itemized miscellaneous deductions is long, but it is not without limitations.
The Two Percent Limit
Most miscellaneous costs are deductible only when they exceed 2 percent of a taxpayer’s adjusted gross income (AGI). Therefore, a taxpayer with $100,000 in AGI must have more than $2,000 in miscellaneous expenses before they may take any deductions. If the taxpayer’s miscellaneous expenses total $2,500, he or she will be able to deduct $500 during that year.
Expenses that are subject to the 2 percent rule include tax preparation fees and unreimbursed ordinary and necessary expenses that an individual paid for or incurred as a requirement for carrying out his or her trade or business. Additional expenses that are deductible and subject to the 2% limit include those taxpayers paid 1) to produce or collect taxable income that must be included in their gross income, 2) to manage, conserve, or maintain property held for producing such income, or 3) to determine, contest, pay, or claim a refund of any tax.
Deductible expenses that are not subject to the 2 percent limit include losses from Ponzi scheme investments, gambling losses that are less than the total of gambling winnings, and certain casualty and theft losses that are typically related to damaged or stolen property held for investment, such as stocks, bonds, artwork or other appreciating collectibles.
Claiming and Supporting Deductions
Taxpayers must maintain receipts, canceled checks, financial account statements, and other forms of documentary evidence to support their claims of miscellaneous deductions, which are reportable on IRS Form 1040, Schedule A, Itemized Deductions, or on Schedule A of Form 1040NR, U.S. Nonresident Alien Income Tax Return.
By keeping track of potentially deductible miscellaneous expenses, taxpayers may decide to accelerate certain expenses in the current year in order to exceed the two percent threshold. Alternatively, they may decide to put off until next year travel to a far-away customer, enrolling in a course to improve their professional skills or purchasing a new tool or instrument used in their trade or business. It is advisable that individuals engage the assistance of professional tax accountants to maximize their tax savings and avoid potential IRS scrutiny of deduction claims.
About the Author: Dustin Grizzle is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where he provides tax-planning and compliance services to high-net-worth individuals and businesses in the manufacturing, real estate management, and property investment industries. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at firstname.lastname@example.org.