26 November 2017
Readers should be aware the tax law signed buy the President on 22 December 2017 made this article obsolete. I leave it here for continuity and posterity.
As advertised last week, this week’s blog is about the ‘certain’ miscellaneous deductions you can take on Schedule A if you itemize your tax return. 'Certain’ miscellaneous deductions are subject to a “2% limitation” – meaning your deductions in this category must exceed 2% of your adjusted gross income (AGI) before they start to actually influence your taxes. Unreimbursed Employee Expenses are also subject to the 2% rule. Fortunately, Unreimbursed Employee Expenses and ‘Certain’ miscellaneous deductions are added together, so it makes it a bit easier to get above that 2% threshold to be able to get a deduction.
For example, Shawn is employed as an auto mechanic, and his 2017 AGI is $50,000. Like most auto mechanics he must bring his own tools to the job. Shawn spends $800 on tools in 2017. Shawn also has $900 of ‘certain’ miscellaneous deductions in 2017. Shawn’s combined Unreimbursed Employee Expenses and ‘Certain’ miscellaneous deductions is $1,700. 2% of Shawn’s AGI is $1,000 (.02 X $50,000). Therefore, Shawn can deduct $700 – the amount by which his combined Unreimbursed Employee Expenses and ‘Certain’ Miscellaneous Deductions exceeds 2% of his AGI.
Without further ado, here are the ‘Certain’ Miscellaneous Deductions:
Appraisal fees for a casualty loss or charitable contribution. Self-explanatory. If you have something appraised to claim it as a tax deduction, you can deduct the fee paid for the appraisal.
Casualty and theft losses from property used in performing services as an employee. While casualty and theft losses are deductible elsewhere on Schedule A, it may be more beneficial to take the deduction here if it was property used in the production of income. It can be added to other ‘certain’ miscellaneous deductions (and unreimbursed employee expenses) to help propel you over the 2% threshold. There is also a $100 per incident subtraction if the loss is claimed on the regular casualty and loss form - form 4684.
Clerical help and office rent in caring for investments. If you have investments generating taxable income and you need to rent office space or pay for clerical help to manage them, you can deduct those expenses.
Credit or Debit Card Convenience Fees for Paying Your Tax Bill. Both the IRS and Virginia will charge you a ‘convenience fee’ for using your debit or credit card to pay a tax bill. That fee can be deducted from your taxes.
Depreciation on home computers used for investments. If your home computer is helping you earn taxable income, you can claim a depreciation expense for it as a ‘certain’ miscellaneous deduction.
Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust. If an estate’s total deduction in it’s final year exceed its income, the beneficiaries can deduct the excess losses on their individual returns.
Fees to collect interest and dividends. If you pay a broker or similar agent to collect interest or stock dividends for you, it can be deducted here. Note, this does not include the fee to buy or sell securities. That fee is used to adjust your capital gain or loss.
Hobby expenses, but generally not more than hobby income. If you have a hobby that generates income you can deduct the expenses of that hobby up to the amount of income it generates.
Indirect miscellaneous deductions from pass-through entities. If you are a member of a partnership, S-corporation, or a non-publicly traded mutual fund, you can deduct any passed-through deductions as miscellaneous deductions subject to the 2% limit.
Investment fees and expenses. You can deduct investment, custodial, and trust administration fees you pay for managing your investments that produce taxable income.
Legal fees related to producing or collecting taxable income or getting tax advice. If your legal fees are for income from your business, real estate investments, or farm, then it is better to deduct those as business expenses on the appropriate Schedule C, E, or F. However, if you received legal tax advice on a personal matter, such as your divorce, you can deduct it here.
Loss on deposits in an insolvent or bankrupt financial institution. If your bank or credit union becomes insolvent or bankrupt, you can deduct any lost deposits here. (Losses insured by FDIC are not deductible.)
Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you. If you take a full distribution from your IRA and the amount you have recovered is less than the amount you contributed, you can deduct the losses on Schedule A.
Repayments of income. Repayments of taxable income received in a previous year of up to $3,000 are deductible, but subject to the 2% limit.
Repayments of social security benefits. If your repayments to SS in a tax year exceed the benefits received, you can deduct the net repayment from your taxes.
Safe deposit box rental, except for storing jewelry and other personal effects. The rental of a safe deposit box is only tax deductible if you are using it to store documents related to the production of income.
Service charges on dividend reinvestment plans. If you are a subscriber to a dividend reinvestment plan, you can deduct the service charges you pay to the plan for holding shares, reinvesting dividends, and keeping your records.
Tax advice fees. Ahem….AHEM! (But if you receive this advice for your business, real estate investments, or farm, then is it more efficiently deducted on the appropriate Schedule C, E, or F.)
Trustee's fees for your IRA, if separately billed and paid. The ordinary and necessary fees you pay to an IRA trustee are deductible if they are billed separately. This would normally apply to someone using a self-directed IRA.
That’s a rather long list, but if you worked your way through it you may have noticed a theme. These deductions are nearly all related to the production of income. The tax code our government has implemented would like to generously provide you with a tax break if you are trying to produce additional taxable income. As long as you exceed the 2% of AGI threshold, of course.
That 2% of AGI threshold is why I rarely get excited about ‘certain’ miscellaneous deductions (or unreimbursed employee expenses). A common scenario I deal with each year is a tax client asking me if they can deduct the $60 they spent on investment fees. The technical answer is ‘yes’, but in reality that $60 is never going to get over the 2% of AGI threshold, so even though we can record it as a deduction on your tax return, you are not receiving any benefit for it.
When I do get excited is when the deductions have exceeded the 2% threshold. That’s when clients probably feel like they are getting the third degree from me as I start asking additional questions, trying to unearth some additional ‘certain’ miscellaneous deductions. Hopefully, I explain everything sufficiently, so nobody thinks I am just sticking my beak into their business!
I’ll finish this ponderous post as I frequently do – with a reminder that taxes can be complex and confusing. Whenever you have any questions you can contact me. Don’t overpay your taxes because you are afraid to ask for help!