Every tax season, frantic filers search for ways to reduce the checks they must write to Uncle Sam. A proven tax strategy is deducting as much as possible.
But sometimes, technically deductible expenses are wasted because they don’t meet other Internal Revenue Service rules. This is often the case for most of the miscellaneous deductions found on Schedule A.
The roadblock preventing the write-off of these assorted expenses is the requirement that they total more than 2 percent of the taxpayer’s adjusted gross income, or AGI. That means a taxpayer with $50,000 in AGI must come up with more than $1,000 in miscellaneous deductions before they do him or her any tax good. Even then, just the amount over $1,000 is deductible. So the 50-grand filer with $1,750 in tax-allowable miscellaneous expenses can only deduct $750, not the full $1,750.
While the 2 percent limit is tough for many filers to reach, it’s not impossible. You just need to know exactly what the IRS considers as allowable miscellaneous deductions. The expenses fall into three general categories: unreimbursed employee expenses, tax preparation fees and “other” expenses.
Unreimbursed employee expenses
Remember that copier toner you bought that Saturday you had to work and the office machine ran dry? What about that fee you paid to become a notary public, a designation requested by your boss to speed up the flow of official documents? If you never got reimbursed for these costs, they could help reduce your personal tax bill as a miscellaneous deduction.
The IRS says you can deduct these expenses you paid out of your own pocket as long as they were required to do your job as an employee and were “ordinary and necessary” to your business or trade. An expense is ordinary if it is common and accepted in your type of business; it’s necessary if it is appropriate and helpful to you in doing your job.
Because you have that percentage target to meet, be thorough here. Most taxpayers know to count the price of professional journal subscriptions and business-related meals and entertainment, but other items the IRS says you can deduct are the costs of work-related classes, legal fees and licenses. Don’t overlook the price of job-required uniforms that you bought (and that aren’t suitable as general attire), as well as amounts you paid for employer-required medical examinations. Even the fee to obtain the passport you needed for that overseas business trip is deductible here.
Certain home-office expenses also might count, as long as the residential workspace is for the convenience of your employer and not just to save you some commuting time. And don’t forget about depreciation on personal computers you use for work. These, too, must be for your boss’s convenience and required as a condition of your employment.
What if you’ve had it with your job and all its ancillary costs? You can deduct as miscellaneous expenses the amounts you spent looking for other employment in the same field.
Some of these expenses require you to fill out an additional tax form, schedule or work sheet. But when you get the final amount that you can deduct, report it on line 21 of Schedule A.
If collecting all your potential work-related deductions prompted you to seek tax help, then the IRS has a tax break for you here. And you don’t have to hire a CPA to get this deduction.
You can deduct the cost of tax-preparation software, tax publications and even costs for associated tax-filing duties, such as copying your returns or paying for return-receipt postage or overnight delivery when you mail them.
If you choose electronic filing, any fee you paid for that service is deductible here. The IRS now even lets you deduct the convenience fee you were charged when you paid your e-filed taxes by credit card.
Just remember, you deduct your tax-preparation expenses for the tax year in which you paid them, not the tax year for which you are filing. So on your 2013 return, you count the tax-related costs you incurred last year to prepare your 2012 taxes. Any expenses you fork over now to complete your current return will count when you file your 2014 forms next year.
Once you’ve totaled your tax-prep costs, enter them on line 22 of Schedule A.
Other miscellaneous deductions
The final 2 percent deduction category is “other” expenses. For most taxpayers, these are costs to produce or collect income, such as investment-related fees, or to manage or maintain property that provides you with some extra earnings.
For the IRS to accept these deductions, the expenses must be “reasonably and closely related to” a taxpayer’s income-producing efforts. Some common expenses that meet this requirement are clerical help in caring for investments, depreciation on home computers used to track and manage investments, and the fee for a safe-deposit box in which you keep investment data. If, however, your bank box holds only jewelry and other personal items, or even tax-exempt securities, the box rental fee is not deductible.
You also can write off several investment-related fees that, while small, could add up. They include service charges on dividend reinvestment plans and trustee’s fees you paid for your IRA. Just make sure your retirement account fee is billed separately rather than included as part of your account’s general management costs, and that you pay it separately.
Even costs associated with a recreational activity could come into play. Take, for example, an amateur photographer who snaps shots of graduations or weddings for the neighbors and gets a few bucks in return. The shutterbug can deduct camera-related expenses as a miscellaneous expense as long as the amount isn’t more than the payments he or she got. The IRS frowns on using hobby expenses to reduce taxes.
All allowable “other” miscellaneous deductions are entered on Schedule A’s line 23. Then all three category amounts (lines 21, 22 and 23) are totaled. Unfortunately, because of the AGI percentage limit, that’s not what you can deduct.
Maximizing miscellaneous deductions
Now you must take your AGI (from line 38 of your Form 1040), multiply it by 2 percent and enter the amount on line 26 of your Schedule A.
If that income percentage is more than your miscellaneous deductions total, you’re out of tax-deduction luck. You can’t claim any of the expenses. But if your fractional AGI amount is less, subtract it from your miscellaneous deductions total — the remainder is what you can claim as an itemized deduction.
In addition to your Schedule A calculations, you might have to complete additional tax forms or work sheets to claim some of these miscellaneous expenses. You can find a complete list of the IRS-approved deductions (and those that aren’t OK), as well as the other tax paperwork each might require in IRS Publication 529, Miscellaneous Deductions. But if the extra paperwork gets you over the 2-percent-of-AGI hurdle, the time spent is probably worth it.
And what if your miscellaneous efforts fell a bit short this filing season? Then set up a deduction bunching strategy now to guarantee that future sundry expenses aren’t wasted. This is simply bunching, or gathering your expenses into one tax year, rather than spreading the costs over several. By doing so, you often can accumulate enough expenses to exceed the deduction threshold.
For example, renew your business subscriptions in December instead of January, or prepay your professional association dues early. This will help turn “nearly” deductible expenses one year into full-fledged tax breaks the next filing season.
The only downside of this plan is that it usually helps you out only every other year. When you push expenses into one year, you generally will find yourself short of the itemized deduction percentage requirement the next year. But getting the breaks on alternate tax filings is still better than missing out on them every year.