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Miscellaneous expenses can add up

Posted by Matt Evans Posted on Aug 25 2016

Did you know that you can deduct work-related expenses, professional advisor fees and even job search costs on your federal tax return? Possibly, but there’s a catch: Miscellaneous expenses must first add up to more than 2% of your adjusted gross income (AGI) or you can’t deduct any of them. Fortunately, with a little planning, you may be able to itemize and deduct more than you think.

The “other” category

Expenses in the miscellaneous category are a mix of items that don’t fit elsewhere — for example, safe deposit box rent, tax preparation software, investment advisor fees and legal costs incurred while attempting to collect or preserve income. You may even be able to deduct costs associated with claiming a refund from the IRS.

For most taxpayers, however, the largest miscellaneous expenses are work related. These include unreimbursed employee business expenses such as union dues and professional and civic organization memberships, uniforms necessary for the job (professional office attire such as suits doesn’t count), and tuition for education requested by an employer.

Employees’ home office costs may also be considered miscellaneous expenses as long as the home office meets the IRS’s definition. (Among other requirements, a home office must be used regularly and exclusively for business.) Note that, if you’re self-employed, home office expenses aren’t subject to the 2% miscellaneous itemized deduction rule: You can deduct them directly from your self-employment income.

Finally, if you’re looking for a job, your employment agency, transportation and other job-hunting costs may be deductible. For them to qualify, you must be seeking a position in the field or profession you currently work or recently worked in. So if you’re looking to leap from insurance to marine biology, you’re probably out of luck — at least from a tax perspective.

Rare and nondeductible expenses

There’s actually a second category of miscellaneous expenses that aren’t subject to the 2% rule, but they generally relate to less-common scenarios. For example, you might be able to deduct:

  • Casualty and theft losses from income-producing properties,

  • Income received as the beneficiary of an estate,

  • Losses from participation in a fraudulent investment scheme, and

  • Gambling losses up to the amount of gambling winnings.

Then there are the miscellaneous expenses you can’t deduct under any circumstances, including adoption fees, funeral expenses, personal legal bills and commuting costs. And if you want to donate to the campaign of a political candidate this election season, go ahead. Just don’t deduct it on your tax return. For a longer list of deduction no-nos, see IRS publication 529.

Better in bunches

Not surprisingly, most taxpayers can’t deduct miscellaneous expenses subject to the 2% floor every year. But even if you don’t deduct them in the 2015 tax year, you may be able to accelerate or defer certain expenses and bunch them in a year when they’re more likely to add up to over 2% of your AGI. Your tax advisor can help explain this, as well as how the alternative minimum tax could affect the benefits of itemized miscellaneous deductions.

This blog is published to provide you with an informative summary of current business, financial, and tax planning opportunities.  Do not apply this general information to your specific situation without additional details.  Be aware that the tax laws contain varying effective dates and numerous limitations and exceptions that can not be summarized easily.  For details and guidance in applying the tax rules to your specific circumstances, please contact us.