Miscellaneous Itemized Deductions

The tax reform eliminates most miscellaneous itemized deductions.

The Tax Cuts and Jobs Act (TCJA) has eliminated many personal itemized deductions. From 2018 through 2025, taxpayers will not be able to deduct expenses such as union dues, investment fees, or hobby expenses. Gambling losses, however, will still be deductible.

What Are Miscellaneous Deductions?

Deductions that don’t fit into other categories of the tax code are miscellaneous deductions.

These include:

Deductions Subject to the 2% Limit
You can only deduct those expenses exceeding 2% of your Adjusted Gross Income.

Miscellaneous deductions subject to the 2% limit fall into these categories:

Unreimbursed Employee Expenses:

• The business bad debt of an employee
• Business liability insurance premiums
• Damages paid to an employer for breach of an employment contract
• Depreciation of a cell phone or computer that your employer requires you to use
• Dues to a chamber of commerce if membership helps you do your work
• Dues to professional societies
• Educator costs (beyond any amount you can deduct as an adjustment to income)
• Home office or part of your house used regularly and exclusively for your work
• Job search expenses in your current occupation
• Laboratory breakage fees
• Legal fees related to your work
• Licenses and regulatory fees
• Malpractice insurance premiums
• Medical exams required by an employer
• Occupational taxes
• Passports business trips
• Research expenses for a college professor
• Rural mail carrier’s auto expenses
• Tax Preparation Fees – You can deduct tax return preparation expenses accrued in the year you pay them, such as software or filing charges. Nevertheless, you can’t deduct the convenience charge for paying your tax by credit card.

Other miscellaneous deductions include:

• Appraisal fees
• Casualty/theft losses
• Clerical help and office rent
• Depreciation of a home computer
• Excess deductions of an estate
• Fees for collecting interest and dividends
• Hobby expenses
• Indirect deductions of pass-through entities
• Investment fees and expenses
• Legal fees related to producing taxable income
• Loss on deposits in an insolvent or bankrupt financial institution
• Loss on traditional IRA’s or Roth IRA’s
• Repayments of income
• Repayments of Social Security benefits
• Safe-deposit box rental
• Service charges on dividend reinvestment plans
• State and local taxes
• Tax advice fees
• Trustee’s fees for your IRA

Deductions That Are Not Subject to the Two Percent Limit
Miscellaneous tax deductions that aren’t subject to the 2% limit include:

• Amortizable premium on taxable bonds
• Casualty and theft losses from income-producing property
• Federal estate tax on income of a decedent
• Gambling losses (up to the amount of winnings)
• Impairment-related work expenses of individuals with disabilities
• Repayments of more than $3,000 under a claim of right

For more info on miscellaneous and other tax deductions, see IRS Publication 529 – Miscellaneous Deductions.

Personal Expenses that Are No Longer Deductible

To be specific, the TCJA suspended for 2018 through 2025 a large group of deductions called “miscellaneous itemized deductions,” which were deductible to the extent they exceeded 2% of a taxpayer’s adjusted gross income. The following deductions are included:

No unreimbursed job expenses are deductible from 2018 through 2025. Your employer should reimburse you for them. The reimbursement is tax-free if you properly document your expenses. Alternatively, you can ask for a raise to help pay for these expenses, but such a raise would be taxable.

Investment Interest

Investment interest is the interest you pay on a loan to purchase an investment. Taxpayers who itemize can deduct investment interest. This deduction, however, is limited to the amount of taxable investment income you earn each year, such as dividends, royalties, or interest. Any disallowed investment interest is carried forward for future deductions. Generally, investment income does not include capital gains or dividends that qualify for favorable tax treatment.

However, you can elect to include long-term capital gains and qualifying dividends in your investment income. By doing so, you can deduct a greater amount of investment interest.
If you do this, however, your long-term capital gain and qualifying dividends will be taxed at your ordinary income tax rates, not the lower capital gains rates.

You can claim a portion of your total job expenses and some miscellaneous expenses. Your expenses must exceed 2% of your adjusted gross income (AGI). Deduct these expenses from your taxable income on Schedule A.

Typically, these three categories fall under the 2% rule:

• Employee business expenses
• Tax-related expenses
• Investment-related expenses

Employee Business Expenses

You might be reimbursed for business expenses by your employer. If not, you could be able to deduct some expenses. When you’re eligible for employer reimbursement but don’t submit a claim, you can’t deduct the costs.

According to the 2% rule on Form 1040, Schedule A, you can deduct your ordinary and necessary business-related expenses. However, they must be ordinary and necessary.

Examples include:

• Entertainment
• Travel
• Business gifts
• Local transportation

Ordinary expenses are common and accepted in your field of trade, business, or profession. It is helpful and appropriate for your business. The expense does not have to be required to be deemed necessary.

Again, job-related expenses deductible under the 2% rule include:

• Vehicle expenses
• Home-office costs
• Unreimbursed entertainment, travel, and gift expenses
• Costs for special work clothes not suitable for everyday use

For more info, see Publication 463: Travel, Entertainment, Gift, and Car Expenses or Publication 529: Miscellaneous Deductions at www.irs.gov.

Tax-Related Expenses

Schedule A allows you to deduct tax-advice costs under the 2% rule. These include:

• Long-distance phone calls to the IRS
• Tax preparation

You can deduct the cost of tax help for:

• Your own business on Schedule C
• Rental activity on Schedule E

The remainder should be claimed under tax-related expenses on Schedule A. You might also be able to deduct:

• Cost of software that tracks deductible expenses
• Taxable sales of assets and investments

If you prep your own taxes, you can deduct:

• Tax-planning and tax-preparation manuals
• Tax-preparation software
• E-filing fees
• Convenience fees charged if you paid your tax electronically using:
  • MasterCard
  • Discover
  • American Express
  • VISA

Instead of Line 22, report these fees on Schedule A, Line 23:

• Postage if you file a paper return

These tax-related amounts can also be deducted:

• Part of the attorney’s fee that applies to tax advice
• Attorney’s fee for securing you alimony in a divorce
• Attorney’s fee and court-filing fees for cases against the IRS over a tax dispute

For more info, see Publication 529: Miscellaneous Deductions at www.irs.gov.

Investment-Related Expenses

Fees and other expenses associated with managing investments can be deducted. The investments must generate taxable income. Fees and expenses will be deducted under the 2% limitation rule.

These include:

• Safe-deposit box rentals for the storage of taxable securities
• Investment books, magazines, and newsletters purchased for investment advice
• Computer software or online services used for taxable investment purposes
• Computers used in whole or in part for investment objectives claimed as depreciation
• Investment advice and management

You cannot include the cost of attending investment seminars or meetings.

Can an Attorney Help Me with My Tax Problems?

State and federal tax laws are both complex and difficult to understand. A tax attorney knows the relevant tax laws and can explain to you how they apply to your situation. A tax attorney can assist you if you’re uncertain how to characterize your expenses or if you need someone to represent you before the IRS.