Miscellaneous Itemized Deductions Subject to a 2% Floor

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Discussion
Miscellaneous itemized deductions are available to taxpayers with certain types of expenses during the tax year. These expenses are broken out into unreimbursed employee expenses, tax preparation fees, and other expenses.

It's also important to be aware of the fact that miscellaneous itemized deductions will not provide a benefit to the taxpayer unless the itemized deductions of the taxpayer exceeds the standard deduction for the year which will be increasingly difficult in 2018 when it is effectively doubled.

Unreimbursed Employee Expenses
Unreimbursed employee expenses are subject to the same rules for deductibility as general business expenses. That is to say that an expense must be paid during the tax year (since the taxpayer operates on a cash basis method of accounting), be incurred for the purpose of carrying on the taxpayers responsibility as an employee, and be ordinary and necessary. Examples of unreimbursed employee expenses include (not all inclusive):

1. Bad debt;
2. Insurance premiums;
3. Damages for breach of contract;
4. Depreciation;
5. Membership dues;
6. Supplies and tools for work (especially relevant to teachers);
7. Home office deduction;
8. Job search expenses;
9. Legal fees;
10. Research expenses;
11. Travel expenses (IRS mileage rate for 2017 is 53.5 cents per mile);
12. Work uniforms (must be unsuitable for everyday use - only used for work - i.e. police uniform, McDonalds uniform, etc.); and
13. Work-related education.

Tax Preparation Fees
Amounts paid to prepare income tax returns are deductible as an itemized deduction.

Other Expenses
Deductible other expenses must meet one of the following requirements to be deductible:

1. Must be paid to produce or collect income that must be included in gross income;
2. Must be paid to manage, conserve or maintain property held for producing such income; or
3. Must be paid to determine, contest, pay, or claim a refund of any tax.

One notable type of expense which falls into this category is hobby expenses. Hobby expenses are generally only deductible to the extent a taxpayer has hobby income, and less favorable than business expenses (since it is only deductible as an itemized deduction and is subject to a 2% of AGI floor). On the other hand, hobby income is not subject to self-employment taxes. Future posts will further explore the differences between hobbies and businesses.

References
https://www.irs.gov/publications/p529

Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.