Miscellaneous Itemized Deductions - March 2012
Richard Scrivanich - Partner
Miscellaneous expenses may generate a tax benefit for you if you itemize your deductions. However, this will also depend in part on your adjusted gross income (AGI) as well as the total of all your miscellaneous expenses.
To determine if these deductions will generate a tax benefit, you will first need to compute the total of all of your expenses that fall into the miscellaneous deduction categories. This amount is deductible as an itemized deduction but only if (and to the extent) it is greater than 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.
Example. Jerry's AGI is $75,000. His 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:
- Tax return preparation costs. This category includes the fee to have your tax return prepared as well as other costs related to determining your taxes, such as appraisal costs or legal fees.
- 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. They also include expenses for which you are reimbursed or are paid an expense allowance but not under an arrangement that meets specific requirements. You will have to include the reimbursements or allowances in income and then separately deduct the expense as a miscellaneous itemized deduction.
(If the 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. Please let me know if you would like more information about deducting employment-related expenses.)
- 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.
- Hobby expenses. Expenses related to an activity that is a mere hobby (i.e., 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.
One final caveat: the deduction for miscellaneous itemized deductions isn't allowed for purposes of the alternative minimum tax.
If you have any questions regarding the above discussed topic or any other tax matter, please feel free to give me a call at (562) 698-9891.