Have you been saving receipts all year with hopes of deducting all of your meals and expenses?
We get a lot of questions from clients on whether or not they can deduct certain items on their tax returns. Can you deduct your work clothes? How about your travel to work? Outside of the common deductions like medical expenses, mortgage interest, state, local, real estate, personal property taxes, and charitable contributions, there are miscellaneous items that can be deducted.
Miscellaneous deductions are the ones that are often missed by taxpayers who do their own taxes. Here’s the tricky part: you can only deduct these items if the total amount of the miscellaneous itemized deductions exceed 2% of your adjusted gross income.
First You Have to Itemize
First thing’s first, there are two ways you can handle deductions. The first way is to just take the standard, no questions asked deduction and be done with it. The second is to itemize. When you itemize, you stand the chance of lowering your tax bill tremendously, but only if the items you are deducting exceed the standard deduction. Here are the standard deductions for 2015.
- Standard deduction for single and married filing separately taxpayers – $6,300
- Standard deduction for married filing jointly or qualifying widow(er) taxpayers – $12,600
- Standard deduction for head of household taxpayers – $9,250
Items that can be deducted
There are several types of deductions you can take when you itemize. Each one has its own stipulations so here is a general rundown.
Unreimbursed Employee Expenses
Unreimbursed employee expenses can be deducted if they were:
- Paid or incurred during the tax year
- Incurred as an employee, to perform your job in a trade, business or profession
- Considered ordinary and necessary in order to perform your job
- Business bad debt of an employee.
- Business liability insurance premiums.
- Damages paid to a former employer for breach of an employment contract.
- Depreciation on a computer your employer requires you to use in your work.
- Dues to a chamber of commerce if membership helps you do your job.
- Dues to professional societies.
- Educator expenses.
- Home office or part of your home used regularly and exclusively in your work.
- Job search expenses in your present occupation.
- Laboratory breakage fees.
- Legal fees related to your job.
- Licenses and regulatory fees.
- Malpractice insurance premiums.
- Medical examinations required by an employer.
- Occupational taxes.
- Passport for a business trip.
- Repayment of an income aid payment received under an employer’s plan.
- Research expenses of a college professor.
- Rural mail carriers’ vehicle expenses.
- Subscriptions to professional journals and trade magazines related to your work.
- Tools and supplies used in your work.
- Travel, transportation, meals, entertainment, gifts, and local lodging related to your work.
- Union dues and expenses.
- Work clothes and uniforms if required and not suitable for everyday use.
- Work-related education.
Tax Preparation fees
You can usually deduct the cost of the tax preparation fees on the return for the year in which you pay them. This includes fees to electronically file and fees for tax software.
Expenses paid to produce or collect income
The income must be included in your gross income and the expenses must be both ordinary and necessary. Examples of this would include fees paid to a lawyer related to producing or collecting taxable income or getting tax advice, depreciation on home computers used for investments, or hobby expenses that do not exceed hobby income.
Expenses paid to manage, conserve, or maintain property held for producing income
Expenses must be ordinary, necessary, reasonable, and closely related to the purposes listed. Examples include appraisal fees for a casualty loss or charitable contribution or safe deposit box rental, except for storing jewelry and other personal effects
Expenses paid for casualty and theft losses from property used in performing services as an employee
Expenses must be ordinary and necessary. Examples include investment fees and expenses, a loss on deposits in an insolvent or bankrupt financial institution, or a loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you.
Expenses paid for work-related education expenses required as an employee
The education must be required by your employer or by the local or federal law to maintain your current salary, employment status or job or the education must be required to maintain or improve skills necessary to perform your current job. Examples of expenses include tuition, books, supplies lab fees, cost of research and qualified travel or transportation costs.
Side note: If you are a student of The Income Tax School, this is where you could deduct these expenses on Schedule A. The courses would fall under the improvement of skills necessary to perform your current job.
Items that don’t fall under the 2% rule
The following deductions are miscellaneous but are not subject to the 2% rule.
- 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 up to the amount of gambling winnings.
- Impairment-related work expenses of persons with disabilities.
- Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
- Losses from Ponzi-type investment schemes.
- Repayments of more than $3,000 under a claim of right.
- Unrecovered investment in an annuity.
If you feel as though your tax bill would be lower by itemizing, the best strategy is to seek help from a tax professional. There are a lot of rules and stipulations surrounding each deduction you take. It’s easy to answer incorrectly while using tax software and end up taking a deduction that does not apply. This can lead to an IRS audit.
If you have questions, please give us a call!