Making sense of the U.S. tax code can be a daunting feat. That’s why many taxpayers turn to professionals when they need to file their tax returns. Regardless of whether you’re working with a tax accountant or completing your own return at home, it’s important to know which tax breaks you’re eligible for. After all, claiming tax credits and deductions is one of the easiest ways to reduce your tax burden. If you have questions about claiming miscellaneous expenses, read on for the lowdown on what’s deductible.
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Which Miscellaneous Expenses Are Deductible?
The IRS gives taxpayers the opportunity to deduct all sorts of miscellaneous expenses. Some costs can be deducted automatically while others can only be deducted if they adhere to the 2% rule (more on that later).
The miscellaneous expenses that you can deduct regardless of whether they follow the 2% rule include losses from falling prey to a Ponzi scheme (or a similar investment scam), impairment-related work expenses (such as those that you incur for dealing with a mental or physical disability) and any money you lose from having someone steal or damage your artwork, stocks and other forms of income-producing property. You may also be able to deduct federal estate tax if you’re a beneficiary and gambling losses up to the total amount of winnings (as long as you have documentation with details about your winnings and losses).
Unreimbursed expenses that you may be able to deduct include job-hunting expenses, home office expenses, legal fees (as long as they’re work-related fees), the cost of buying and maintaining a uniform (as long as you’re required to wear it to work and you can’t wear it in your spare time) and dues you pay for being a member of a union, professional society or chamber of commerce (as long as your membership is related to doing your job). Educators may be able to deduct up to $250 of unreimbursed expenses if they’re single or up to $500 if they’re married and filing a joint tax return with another professional in the education field.
Certain unreimbursed business expenses may be deductible, too. For example, rural mail carriers may be able to deduct the costs associated with driving a vehicle and business owners can potentially deduct the cost of paying regulatory and license fees. Employees may be able to deduct their business travel expenses, paid occupational taxes, bad business debt and expenses paid while completing a medical exam for work.
If you itemize your deductions, the expenses you pay while filing your taxes may also be deductible. For example, if you paid to file your 2019 tax return electronically in 2020, you may be able to deduct those expenses on your 2020 tax return.
And as long as they’re in compliance with the 2% rule, other expenses may be deductible as well. That means you may be able to get a tax break for your investment fees, hobby expenses, losses on deposits (if your bank has to file for bankruptcy), appraisal fees (if they’re paid for a donation of property or a casualty loss) and the depreciation of your home computer if it’s used for investment purposes. For a full list of all the deductible miscellaneous expenses, you’ll need to review Publication 529 on the IRS website.
The 2% Rule
The 2% rule limits the amount of miscellaneous expenses you can deduct. Under this guideline, you can only write off certain costs if the total amount is equal to more than 2% of your adjusted gross income (AGI). Miscellaneous expenses that are subject to the 2% rule fall into three categories: tax preparation fees, unreimbursed employee expenses and other expenses you pay to (a) receive taxable income (b) manage an investment property or (c) get a tax refund.
Let’s look at an example. Let’s say that when you add up your job hunting expenses, business travel expenses and union dues, you have $1,500 that you may be able to deduct. If your AGI is $40,000, 2% of that is $800. So based on the 2% rule, you would only get a $700 tax deduction for your miscellaneous expenses ($1,500 – $800 = $700).
Miscellaneous Expenses That Aren’t Deductible
Not all miscellaneous expenses are deductible. Even if they would help you meet the 2% rule, you wouldn’t be able to deduct the money you spent while lobbying or engaging in political activities, meeting with a lawyer for personal reasons or planning a funeral. The costs associated with adopting a child, paying a parking ticket or fine or installing a home security system aren’t deductible either.
Other non-deductible expenses include broker’s commissions, hobby losses, certain licenses (such as marriage licenses and vehicle licenses), personal living expenses and losses from the sale of personal property (like a car or home). Commuting expenses and costs related to repairing a home cannot be deducted in most cases. There are some exceptions to that rule, however. Expenses paid when operating a business in a home office or commuting to a different location for a work seminar may be deductible.
Claiming Your Miscellaneous Deductions
In order to claim most miscellaneous deductions, you’re required to itemize your deductions using the Schedule A form. You’ll use that tax form to report the total amount of unreimbursed expenses, tax preparation fees and other expenses you have and the deduction you’re claiming for those expenses (after you determine whether they’re more than 2% of your AGI). Don’t forget to account for the miscellaneous expenses that aren’t subject to the 2% limit.
You may need to attach other tax forms as well, depending on the kinds of deductions you’re trying to claim. For example, if you’re an employee and you’re trying to deduct your business expenses, you’ll need to complete Form 2106 or Form 2106-EZ. Then you’ll attach that form and Schedule A to your tax return.
Note that if you’re an educator, you have the option of claiming the educator expense deduction, an above-the-line deduction that you can take even if you’re claiming the standard deduction. Since the educator expense deduction only lets single taxpayers get a tax break for having up to $250 of unreimbursed expenses, you can write off your expenses on Schedule A instead if you have a larger amount of unreimbursed expenses. But keep in mind that you won’t be able to deduct those expenses at all if you can’t follow the 2% rule.
As you’re preparing to file taxes, it’s in your best interest to take advantage of every tax break you qualify for. While having miscellaneous expenses can help you save money during tax season, you can only get a deduction if you abide by all IRS guidelines.
Tax Planning Tips
- If you need any help planning for tax season and getting your documents in order, don’t hesitate to enlist the help of a financial advisor or another type of financial professional. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- It you’re expecting a tax refund, having a plan can increase the chances that you’ll put it to good use. Here are five smart ways to invest your tax refund in 2023.
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