7 Facts About Miscellaneous DeductionsPublished:
Tips for Claiming Miscellaneous Deductions on Your Income Tax Return
Itemizing your deductions (as opposed to claiming the standard deduction) means that you may be able to deduct certain miscellaneous expenses on your income tax return.
Miscellaneous tax deductions can reduce your taxable income, which in turn helps lower the amount of tax you owe. Unfortunately, miscellaneous deductions are commonly misunderstood.
Here are 7 things you should know about miscellaneous deductions:
1. Miscellaneous Deductions Are Reported on Schedule A of Form 1040
This has two implications. First, it means that you have to file IRS Form 1040 (not Form 1040A or Form 1040EZ). It also means that you have to itemize your deductions in order to claim your miscellaneous expenses.
If the sum of your miscellaneous deductions plus the rest of your itemized deductions are less than your standard deduction amount, then claiming miscellaneous deductions does not offer enough benefit. In this case, you should probably claim the standard deduction instead.
RELATED: Top 5 Tax Deductions for Individuals
2. You Can Deduct Tax Preparation Fees as a Miscellaneous Deduction
The money that you pay to prepare/file your income taxes can be deducted on your tax return. This includes the cost of tax preparation software and professional tax preparer fees. However, you must incur the expenses in the same year for which you are filing your tax return. For example, if you pay to have your 2014 return prepared/filed in February 2015, you can deduct the cost on your 2015 tax return (because that is the year the cost was incurred). According to the IRS, approximately 22 million people claim this deduction.
3. Miscellaneous Deductions Are Where You Report Business Expenses If You Don’t Own the Business
If you have to spend money on items that are required for your job, you may be able to deduct them as a miscellaneous deduction. Note that you cannot claim this tax deduction if your employer reimbursed you in any way, or if you derived significant benefits from the expense.
If you subscribe to work-related publications, you can deduct the cost of these publications as a miscellaneous deduction. This doesn’t mean that you should keep your receipt every time you buy a magazine at the checkout. Only publications that are related to your line of work qualify for a deduction.
RELATED: 5 Tax Deductions for Businesses
4. Most Miscellaneous Deductions Are Subject to a 2% Threshold
There are essentially two types of miscellaneous deductions. The first type is subject to a 2% limit. That means you can only deduct the portion of your expenses that exceeds 2% of your Adjusted Gross Income (AGI). It includes expenses such as unreimbursed employee expenses, union dues, and work-related travel. If your total miscellaneous expenses are less than 2% of your AGI, you cannot claim them for a tax deduction.
The second type of miscellaneous deduction is not subject to the 2% limit. This includes expenses like gambling losses, losses from Ponzi-type investment schemes, and certain casualty and theft losses.
5. You Can Deduct Hobby Expenses
If you make money from a hobby but it doesn’t qualify as a Schedule C business, you may be able to claim a miscellaneous deduction for your hobby expenses. Note that the recordkeeping requirements for this deduction are the same as for any business expense.
Additionally, you can only deduct up to the amount of income you made from the hobby. That income should be reported on Line 21 of Form 1040.
6. You Can Deduct Losses from Ponzi Schemes and Gambling
If you have fallen victim to a Ponzi-type investment scheme (also known as a “pyramid scheme”), you can take some solace in the fact that the extent of your losses can be claimed as a miscellaneous deduction. You can also deduct your gambling losses, up to the amount of your gambling winnings.
7. People Try to Deduct Strange Things
When a news broadcast or magazine does a story on “strange tax deductions,” most of the time they’re talking about miscellaneous deductions. Although the name makes it sound as if it’s a catch-all category for expenses that you can’t deduct elsewhere, the IRS has specific rules on what qualifies as a miscellaneous deduction.
Unreimbursed business expenses is the most common category that people try to shoehorn odd deductions into. Be aware that these items receive extra scrutiny from the IRS. You will need to keep receipts and provide evidence for every item, and consider hiring a professional tax professional to help if your situation is complex.
For more information, please see IRS Publication 529 (Miscellaneous Deductions).