Miscellaneous Itemized Deductions
fall into two broad categories: those subject to the 2% limitation and those not subject to the limitation. Miscellaneous Itemized Deductions
subject to the 2% limitation can only be deducted to the extent their total exceeds 2% of your adjusted income. For example, if your adjusted gross income is $50,000 and you have $1,250 in eligible deductions, you can only deduct $250.
$50,000 Adjusted gross income x 2% = $1,000
$1,250 Deductions - $1,000 = $250 Deductible amount.
You can deduct all miscellaneous Itemized Deductions
not subject to the limitation.
Subject to the 2% Limitation
Those deductions subject to the 2% limitation are broken down into 3 categories by the IRS:
Employee Business Expenses
- Employee Business Expenses deducted on line 21
- Tax Preparation Fees on line 22
- Other deductions on line 23
Expenses incurred as an employee may be deducted as a miscellaneous Itemized Deduction
subject to the 2% limitation. Included in this category are a number of types of expenses. In order to be deductible, the expenses must be
- Paid or incurred during the tax year
- For carrying on your trade or business of being an employee
- Ordinary and necessary. It is considered ordinary if it is common and accepted in your trade. It is necessary if it is helpful to you in your business.
- Not reimbursed
Travel expenses are deductible if your duties require you to be away from your tax home for longer than an ordinary day's work and you need to sleep or rest while away from home.
Your tax home is your regular place of business and includes the entire general area in which your business is located.
If your out-of-town work assignment is temporary, your tax home does not change. If the assignment is for an indefinite period of time your new place of assignment becomes your tax home. In this case, any reimbursement by your employer for living expenses are taxable income and those expenses are not deductible.
These are deductible only when traveling out of town (away from your tax home) overnight or if the meal is business-related entertainment. They must not be "lavish and extravagant," based on facts and circumstances.
You can deduct the actual cost of meals or the standard meal allowance. This allowance is presently set at $46 per day. However, some localities are designated by the IRS as high-cost areas with a higher standard meal allowance. These rates are listed in IRS Publication 1542
. Transportation workers may elect a special rate of $59 per day for all out-of-town travel.
Regardless of whether you take actual expenses or the standard meal allowance, your deduction is reduced by 50%. If you are a transportation worker subject to the Department of Transportation's "hours of service" rule, you may deduct 80.0% of your meal expenses.
In order for travel expenses to be deductible, the trip must have been primarily for business purposes. Even though there may be an element of personal pleasure, the cost of getting to and from the destination are deductible. Any extra expenses not related to the business purpose are not deductible.
Expenses to attend a convention are deductible if it can be shown that your attendance benefits your trade or business.
If the trip was primarily for personal reasons the cost of the trip is a non-deductible personal expense. However, any expense that is incurred and is directly related to your business may be deducted.
Travel outside the United States is subject to special rules and may be only partially deductible.
Business-related expenses for entertainment may be deducted if they were incurred to entertain a client, customer, or employee. These are generally subject to the 50% limitations applicable to meals and must be directly related to your business and associated with it.
You cannot deduct any dues or membership fees for membership in country clubs, golf and athletic clubs, airline clubs, or hotel clubs. Likewise dues or membership fees to clubs whose purpose is pleasure or recreation cannot be deducted.
You can deduct the cost of gifts given to customers or employees. However, there is a deductible limit of $25 per person each year.
You cannot deduct commuting expenses from your home to your place of business and return, regardless of the distance involved. You can deduct ordinary and necessary transportation expenses that occur:
- Getting from one workplace to another in the course of your business while traveling within your tax home. For example, travel from one worksite to another is deductible.
- Visiting clients or customers. If you call on a customer, that is a deductible transportation expense.
- Going to a business meeting away from your regular workplace.
- Getting from your home to a temporary workplace when you have more than one regular place of work. The expenses of traveling from home to a temporary workplace are included as deductible under this category.
If you have no regular place of work, you can deduct daily transportation costs between home and a temporary work site outside the metropolitan area. You cannot deduct daily transportation costs between your home and temporary worksites. The end result of this is that you cannot deduct the travel to the first worksite each day or travel from the last worksite to your home. However, you can deduct travel between worksites during the day.
If you have two places of work during the same day you can deduct the expense of getting from one workplace to the other.
Other notes about transportation expenses:
- The costs of transportation by air, rail, bus, taxi, as well as the costs of driving your personal vehicle are deductible.
- Fees paid to park your vehicle at your place of work are not deductible, but you may deduct business-related parking fees when visiting customers or clients.
- Putting display advertising on your vehicle does not change the use from personal to business.
- The costs of using your car in a non-profit car pool are not deductible. Payments from passengers in your car are not taxable income.
- Hauling tools or other work-related items in your vehicle do not change the nature of the vehicle's use.
- If you get your work assignments from a union hall, the costs of getting from the union hall to your place of work are considered nondeductible commuting expenses.
- If you have an office in your home that qualifies as your principal place of business, you can deduct daily transportation costs between your home and another work location.
You can deduct actual expenses or the standard mileage rate for the use of your owned or leased vehicle for business purposes. Currently, the standard mileage rate is 56.5 cents per mile. If you take the standard rate, you may also deduct parking and toll fees.
The standard mileage rate is not allowed in several cases:
- If the car is for hire, such as a taxi
- If you use five or more cars at the same time
- If you have used actual expenses in the past and included a depreciation deduction for the car using any method other than straight-line depreciation
- If you have claimed a Sec. 179 deduction or a special depreciation allowance on the car
- If you claimed actual car expenses after 1997 for a leased vehicle
Actual car expenses include depreciation, gas, insurance, lease payments, licenses, oil, registration fees, repairs, and tires. You must determine the percentage of time the car was used for business purposes and apply that percentage to the total cost of operating the car to determine your deduction.
Work-Related Education Expenses:
In order to deduct educational expenses you must meet three criteria:
1. Be working
2. Itemize your deductions on Schedule A
if you are an employee or file Schedule C or F
if you are self-employed.
3. Have expenses for education that meet the requirements for work-related education.
In order to meet the requirements for work related education, the education must:
- Be required by your employer or the law to keep your present salary, status, or job.
- Maintain or improve skills needed in your present work.
It is not deductible if the education is needed to meet the minimum educational requirements of your present trade or business or is part of a program that will qualify you for a new trade or business. For example, if you are employed in a CPA office, and are taking classes that will meet the educational requirement to become a CPA, those expenses are not deductible. As another example, assume you are employed in Human Resources and are taking law classes. This education is not deductible as it may qualify you be become an attorney which is a new trade or business.
Deductible education expenses include:
- Tuition, books, supplies, lab fees, and similar items
- Transportation expenses in getting to school
The cost of travel as education is not deductible even if directly related to your duties in your work.
If you are reimbursed by your employer for employee business expenses, it will be under an accountable or a non accountable plan.
Under an accountable plan, you account to your employer for your actual expenses and are reimbursed by the employer for those expenses. In this case, your employer should not include your reimbursements as income on your W-2
and you do not report any income or expenses on your return. This presumes reimbursement for mileage at the IRS rate.
Under a non accountable plan, you are given a lump sum for business related expenses and do not account to your employer for the expenses. These payments to you should be included as income in Box 1
of your W-2
and you should complete Form 2106
to deduct the expenses.
Tax Preparation Fees
Tax preparation fees are deductible in the year paid. This includes the cost of paying someone to prepare your return as well as the cost of tax preparation software and tax publications. Electronic filing fees are deductible. However, if you pay your taxes by credit card, the convenience fee is not deductible.
If you file a Schedule C, E, or F
, the portion of the fee applicable to that activity may be deducted on that form.
A fee paid for an appraisal to figure a casualty or theft loss or the fair market value of donated property is deductible.
Expenses incurred in earning taxable investment income may be deductible. This would include:
- clerical help and rent in connection with your investments
- investment fees, custodial fees, trust administration fees, and other expenses incurred in managing your investments
- trustee's administrative fees for an IRA
- service charges on a dividend reinvestment plan
- depreciation on a home computer used to produce income
- fees to collect interest and dividends paid to a broker or similar agent
- safe deposit box rent when used to store taxable income-producing investments or papers.
These are deductible only in the following instances:
Repayment of Income:
- Incurred in doing or keeping your job
- For tax advice related to a divorce, if specified in the bill
- To collect taxable alimony
- Unlawful discrimination claims. However, this may be deducted on Line 36 of the 1040 as an adjustment to income.
If you had to repay an amount included in income in a previous year you may be able to deduct the amount repaid. If $3,000 or less, it is subject to the 2% limitation. If above $3,000, it may not be subject to the 2% limitation.
You can deduct as a miscellaneous Itemized Deductions
hobby expenses incurred but only up to the amount of income included from the hobby. Hobby income is reported as Other Income
on Line 21
of the 1040
Excess Deductions of an Estate:
If an estate's total deductions in its final tax year are more than its gross income for the year, the beneficiaries can deduct the excess expenses.
Not Subject to the 2% Limitation
The following items are miscellaneous Itemized Deductions
that are not subject to the 2% limitation. They should be entered on Line 27
of Schedule A
- Amortizable premium on taxable bonds
- Casualty and theft losses from income-producing property
- Federal estate tax on income in respect of a decedent
- Gambling losses, but only in an amount equal to your reported gambling winnings
- Impairment related work expenses of persons with disabilities
- Loss from other activities from Schedule K-1, box 2
- Repayments of more than $3,000 under a claim of right
- Unrecovered investment in an annuity
The following is a list of items that are not deductible:
- Adoption expenses
- Broker's commissions paid in connections with an IRA or other investment property
- Burial or funeral expenses
- Campaign expenses
- Capital expenses
- Check-writing fees
- Club dues
- Commuting expenses
- Fees and licenses, such as marriage licenses or dog tags
- Fines and penalties
- Health spa expenses
- Home repairs, insurance, and rent
- Home security system
- Illegal bribes and kickbacks
- Investment seminars
- Life insurance premiums
- Lobbying expenses
- Losses from the sale of your home or personal assets
- Lost or misplaced cash or property
- Lunches with co-workers
- Meals while working late
- Medical expenses as business expenses
- Disability insurance premiums
- Personal legal expenses
- Personal living expenses
- Political contributions
- Professional accreditation fees such as the fee paid for the initial right to become a CPA
- Residential telephone line
- Expenses of attending a stockholders' meeting
- Expenses incurred in earning or collecting tax-exempt income
- The value of wages not received or lost vacation time
- Travel expenses for another person
- Voluntary unemployment benefit fund contributions