When many people think of itemized deductions, they only consider the big three: the deductions for home mortgage interest, state and local income and property taxes, and charitable contributions. However, itemized deductions are not limited to the big three. A large group of deductions is lumped together in a category called “miscellaneous itemized deductions.” They are deductible only to the extent they exceed 2% of a taxpayer’s adjusted gross income.
Example: Ladonna, a single taxpayer, has an adjusted gross income of $50,000. She may deduct her miscellaneous itemized deductions only to the extent that they exceed 2% of $50,000, or $1,000. This year she had $100 in tax preparation fees and $1,100 in unreimbursed employee expenses. Her total miscellaneous itemized deductions are $1,200, but because of the 2% of AGI limit, she may only deduct $200 of this amount—the amount that exceeds $1,000.
The following expenses are deductible as miscellaneous itemized deductions if and to the extent they all together exceed 2% of your adjusted gross income (AGI).
Unreimbursed job expenses. Unreimbursed job expenses are by far the most important miscellaneous itemized deduction. These are work-related expenses an employee pays out of his or her own pocket. They include:
- work-related travel, transportation, meal, and entertainment expenses
- business liability insurance premiums
- depreciation on a computer or cellular telephone your employer requires you to use in your work
- dues to a chamber of commerce if membership helps you do your job
- dues to professional societies
- education (work-related)
- home office expenses for part of your home used regularly and exclusively in your work
- expenses of looking for a new job in your present occupation
- legal fees related to your job
- malpractice insurance premiums
- a passport for a business trip
- subscriptions to professional journals and trade magazines related to your work
- tools and supplies used in your work
- union dues and expenses, and
- work clothes and uniforms (if required and not suitable for everyday use).
If your employer doesn’t reimburse you for these costs, you can deduct them as a miscellaneous itemized deduction, so long as they are ordinary, necessary, and reasonable in amount.
Investment Expenses. You can earn money by engaging in personal investing—for example, by having personal bank accounts that pay interest, or investing in stocks that pay dividends and appreciate in value over time (hopefully). The IRS calls activities like these—that are pursued primarily for profit but aren’t businesses—income-producing activities. You can deduct the ordinary and necessary expenses you incur to produce income, or to manage property (including real estate) held for the production of income. These expenses include such items as clerical help and office rent for investment-related work, investment fees and expenses, legal and tax advice, rental fees for a safe deposit box if it is not used to store jewelry and other personal effects, and more.
Tax preparation fees. This includes costs for hiring a tax pro or buying tax preparation software or tax publications. It also includes any fee you pay for electronic filing of your return. If you have a tax pro prepare both your personal and business taxes, ask for a separate bill for your business return. Reason: This amount will be fully deductible as a business expense whether or not you itemize your deductions, but the costs of preparing your personal return are deductible only as a miscellaneous itemized deduction and subject to the 2% of AGI threshold.
Fees to fight the IRS. You may deduct attorney fees, accounting fees, and other fees you incur to determine, contest, pay, or claim a refund of any tax.
Gambling losses. These are deductible up to the amount of your gambling winnings for the year. You cannot simply reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. These losses are not subject to the 2% limit on miscellaneous itemized deductions.
Hobby expenses. A hobby is an activity you engage in primarily for a reason other than to earn a profit—for example, to have fun. Expenses from a hobby are deductible only if you have income from the hobby and only up to the amount of hobby income earned during the year.
You should keep records of your expenses for miscellaneous itemized deductions throughout the year. They can be worth a lot.