Learning About Miscellaneous Itemized Deductions
There are several different types of deductions available to taxpayers on their tax returns. Along with these different types of deductions are different rules and eligibility requirements will have to be considered before taking a tax deduction. One particular type of expense is classified as a “miscellaneous itemized deduction.” Taxpayers can elect to take either a standard deduction or itemize their deductions. Depending on your adjusted gross income (AGI) and the total of all your miscellaneous items, taking this route may lead to a tax savings by itemizing.
Standard Deduction or Itemized Deduction
For most taxpayers, the standard deduction will provide the greatest tax savings, but for other taxpayers with higher incomes and deductions, understanding miscellaneous itemized deductions will be very important. Tax software such as TurboTax and H and R Block will be able to provide calculations of miscellaneous itemized deductions.
A comparison of all expenses versus the standard deduction is needed. It is necessary to compute the total of all 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.
What are miscellaneous itemized deductions? The following are itemized deductions subject, in total, to the 2% rule described above:
- Tax return preparation costs are considered miscellaneous itemized deductions. This category includes the fee to have your tax return prepared. It also includes other costs related to determining your taxes, such as appraisal costs or legal fees that are paid to lawyers. Again, this deduction is only useful if you have large expenses in this area because of the limitations on itemized deductions.
- Unreimbursed Employment-related expenses of an employee miscellaneous itemized deductions. If you incur deductible expenses in connection with your employment, they are miscellaneous deduction items. These include out-of-pocket expenses for which you are not reimbursed by your employer. 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 certain IRS requirements, the reimbursement or allowance isn’t included in income and the expense isn’t deducted.
- Investment expenses, and expenses of producing or collecting taxable income are miscellaneous itemized deductions. This category includes investment advisor’s fees, investment publications, and the cost of a safe deposit box. Certain taxpayers may qualify as active traders which will also allow them to take more deductions for expenses related to their trading business.
- Hobby expenses are miscellaneous itemized deductions. 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.
Remember, if you are subject to AMT rules, the deduction for miscellaneous itemized deductions isn’t allowed for purposes of the alternative minimum tax.