Many people itemize deductions on Schedule A of their tax returns, rather than taking the standard deduction. Your tax preparer will generally advise you to do so if your allowable itemized deductions exceed the standard deduction.
Most itemized deductions are well known and fairly well-understood. Examples include property taxes, home mortgage interest, state and local income taxes, charitable donations and medical expenses.
But you can also write off miscellaneous itemized deductions. These are less well known and not always understood, so you may be missing out. Here's what you need to know to keep that from happening.
Miscellaneous itemized deductions fit into two categories.
- Items that, when added together, can be deducted only to the extent they exceed 2% of your adjusted gross income (AGI). AGI is the number on the last line of page 1 of your Form 1040. It includes all taxable income items and selected write-offs such as the ones for deductible IRA contributions, moving expenses and alimony paid.
- Items that are not subject to the 2%-of-AGI deduction threshold.
Phase-Out Rules Disallow Deductions for Some
Items in both categories are subject to the itemized deduction phaseout rule that applies to high-income individuals. Under this rule, you can lose up to 80% of affected deductions. For 2016, the phaseout rule kicks in when AGI exceeds:
- $259,400 for singles (unchanged from 2015),
- $311,300 for married joint-filing couples (unchanged from 2015),
- $285,350 for heads of households (unchanged from 2015), and
- $155,650 for married individuals who file separate returns (unchanged from 2015).
Under the phaseout rule, the total amount of affected itemized deductions is reduced by 3% of the amount by which AGI exceeds the applicable threshold. But the reduction cannot exceed 80% of the otherwise allowable deductions that you started off with.
Key point: Most taxpayers aren't troubled by the itemized deduction phaseout rule. Even when applicable, it doesn't make a big difference unless you have a really high income.
Items in both categories are completely disallowed under the alternative minimum tax (AMT) rules. So if you're liable for AMT for the year, you can forget about any write-offs for miscellaneous itemized deduction items.
What's Subject to the 2%-of-AGI Threshold
The 2%-of-AGI deduction threshold applies to the following miscellaneous itemized deduction items:
Job-related expenses. These include job-search costs, though you can deduct costs to search for a new job only in your existing occupation or profession. Unreimbursed employee business expenses also fall in this category. These include:
- Professional association dues,
- Subscriptions to professional publications, mobile devices used primarily for business,
- Small tools and supplies,
- Safety equipment,
- Protective clothing and uniforms (if not suitable for ordinary wear), and
- Physical exams required by your employer.
In addition, you can throw in expenses of having an office in your home if it's maintained for your employer's convenience.
Tax preparation expenses. These include preparation fees you pay your tax adviser.
Other expenses. These items include:
- Expenses incurred for the production or collection of income (such as the cost of legal actions to collect damages, unpaid insurance claims, wages, investment income, alimony and so forth),
- Expenses for the management, conservation and maintenance of taxable-income-producing assets (such as office expenses, clerical help, accounting and legal fees, investment advisory fees, custodial fees, trust administration fees, and the rental of a safe deposit box used to store investment-related documents),
- Expenses for tax advice (including in divorce situations) and any expenses related to the determination, collection or refund of any tax including federal income tax (including legal and tax professional fees),
- Hobby expenses (but only to the extent of income from the hobby activity), and
- Legal expenses related to doing or keeping your job, such as fees paid to defend yourself against criminal charges arising from employment.
What's Not Subject to the 2%-of-AGI Threshold
You can write off the following miscellaneous expenses without having to worry about the 2%-of-AGI deduction threshold:
- Gambling losses for the year (but only to the extent of your gambling winnings for the year),
- Bond premium amortization for taxable bonds,
- Casualty and theft losses of income-producing assets (such as stolen or destroyed securities and losses from Ponzi investment scams), and
- Federal estate tax paid on income-in-respect-of-a-decedent.
Referred to in that last point is income that a deceased person would have collected if he or she continued to live but that wasn't properly included in taxable gross income on the decedent's final Form 1040. Such not-yet-taxed income counts as an asset of the decedent's estate for federal estate tax purposes and can result in an additional estate tax hit. If you inherited an income-in-respect-of-a-decedent item, the miscellaneous deduction for the applicable estate tax could apply to you.
Only the Beginning
Believe it or not, this is only the beginning of many tax-saving miscellaneous itemized deductions worth considering. This article doesn't cover them all. Ask your tax adviser whether you have other expenses that might qualify.