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 is a catch: Miscellaneous expenses must first add up to more than 2% of your adjusted gross income (AGI) or none is deductible. Fortunately, with a little planning, you may be able to itemize and deduct more than you think.
Deductions Subject to the 2% Limit
Examples of these deductions are safe deposit box rental, tax preparation fees or software, investment advisor fees and legal costs for estate planning or to collect or preserve income.
Taxpayers can deduct work-related expenses that were not reimbursed by their employer such as union dues and professional memberships, uniforms necessary for the job (professional office attire such as suits does not count), and tuition for education requested by an employer.
If you are looking for a job in your current profession, or recently left a position in your current profession, job-hunting costs, such as transportation and employment agency, may be deductible. So, if you are looking to leap from insurance to marine biology, you are probably out of luck, at least from a tax perspective.
Employees’ home office costs may also be considered miscellaneous expenses as long as the home office meets the IRS’s definition. A home office must be used regularly and exclusively for business. Note that, if you are self-employed, home office expenses are not subject to the 2% miscellaneous itemized deduction rule; you can deduct them directly from your self-employment income.
Rare Deductions Not Subject to the 2% Limit
There is actually a second category of miscellaneous expenses that are not subject to the 2% rule; however, they generally relate to less-common scenarios. For example, you might be able to deduct:
- Casualty and theft losses from income-producing properties;
- Federal estate tax on income in respect of a decedent;
- Losses from Ponzi-type investment schemes; and
- Gambling losses up to the amount of gambling winnings.
Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.
Better in Bunches
Not surprisingly, most taxpayers cannot deduct miscellaneous expenses every year because the total does not exceed 2% of your AGI. However, even if you do not 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 are more likely to add up to more than 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.
For more information, contact Jacqueline Janczewski at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.