When you itemize tax deductions, you can save you quite a bit of money. However, if you don't understand which expenses are allowable tax deductions, problems can arise if you're not careful how you claim them.
This page:
• Describes two types of miscellaneous tax deductions
• Explains how to itemize miscellaneous expenses.
• Makes clear the difference between limited and un-limited deductions
Make claiming deductions easier
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Identifying allowable and not allowable tax deductions
Miscellaneous tax deductions are those that do not fit into any of the other categories of allowable deductions, but are still claimed as separate itemized tax deductions.
Most often when you think of "writing something off" on your taxes, you are in fact thinking of something that would fall into miscellaneous tax deductions.
And you're probably often wrong, because not many things can be legally deducted, contrary to common opinion.
Sidebar Keep in mind, as you read along, that e-filing makes itemizing deductions a snap: you avoid costly mistakes, and all the calculations are done for you. H&R Block offers affordable e-filing with the benefit of having a tax professional review your return.
The types of miscellaneous deductions.
Miscellaneous expenses are grouped into two separate allowable tax deductions.
There are certain expenses that are subjected to a 2% limitation and ones that are not. The 2% limitation means some expenses are deductible only in so much as they exceed 2% of your adjusted gross income. Other miscellaneous expenses are not subject to the limitation when you itemize tax deductions.
Although there is no one way to define all the miscellaneous expenses that are allowable tax deductions and include all the unusual tax deductions, there is one rule you can apply. All the miscellaneous allowable tax deductions are necessary expenses you may incur for the production of income.
Why would the IRS let you claim so many expenses when you itemize tax deductions you may wonder. To generate taxable income. The IRS encourages us to invest or start a business by giving us tax deductions when we do so. In turn, if our income increases, we owe more taxes - which keeps the IRS happy.
Miscellaneous tax deductions subject to the 2% limitation
When you itemize tax deductions specifically listed on your tax return are the ones that are subjected to the 2% limitation. These limited tax deductions include:
• legal fees
• appraisal fees
• investment expenses
• tax preparation fees
• cost of education that improves/maintains job skills • cost of safe deposit box storing bonds
• job-seeking expenses (as long as it is the same field as your current job)
• un-reimbursed work-related expenses, such as subscriptions to periodicals, union dues, initiation fees, business liability insurance, cost of tools of your trade, cost of safety equipment and clothing.
Hobby expenses up to the amount of hobby income reported on your tax return are also deductible. (See other taxable income.)
Deductions not subject to the 2% reduction
When you itemize tax deductions for expenses that are not subjected to the 2% limitation they should also be well-documented. These unlimited tax deductions include:
• gambling losses (up to the amount of your winnings)
• expenses for handicapped individuals
• federal estate tax
• bond premiums
• cessation of annuity
• and unrecovered cost from a decedent's pension.
If you declare any of these allowable tax deductions, extensive proof of the expenses should be on hand. Written proof is generally the best. If you gamble, you should keep a log of winnings and losses with dates and serial numbers of machines or games you were playing. If you itemize tax deductions for any other miscellaneous expense you should also have some form of official written proof.
You can get more information about miscellaneous tax deductions directly from the IRS, in the form of IRS Publication 529
If you file a paper tax return, you will also need to fill-in the appropriate line on your Schedule A. If you e-file, all of this will be done for you electronically.
Note: you will need an Adobe Acrobat Reader to view these publications, which you can get here. (But you probably already have it.)
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