Many people itemize deductions on Schedule A of their tax returns, rather than taking the standard deduction. Your tax preparer will generally advise you to do so if your allowable itemized deductions exceed the standard deduction.
Most itemized deductions are well known and fairly well-understood. Examples include property taxes, home mortgage interest, state and local income taxes, charitable donations and medical expenses.
But you can also write off miscellaneous itemized deductions. These are less well known and not always understood, so you may be missing out. Here's what you need to know to keep that from happening.
Miscellaneous itemized deductions fit into two categories.
1. Items that, when added together, can be deducted only to the extent they exceed 2% of your adjusted gross income (AGI). AGI is the number on the last line of page 1 of your Form 1040. It includes all taxable income items and selected write-offs such as the ones for deductible IRA contributions, moving expenses and alimony paid.
2. Items that are not subject to the 2%-of-AGI deduction threshold.
Phase-Out Rules Disallow Deductions for Some
Items in both categories are subject to the itemized deduction phaseout rule that applies to high-income individuals. Under this rule, you can lose up to 80% of affected deductions. For 2016, the phaseout rule kicks in when AGI exceeds:
Under the phaseout rule, the total amount of affected itemized deductions is reduced by 3% of the amount by which AGI exceeds the applicable threshold. But the reduction cannot exceed 80% of the otherwise allowable deductions that you started off with.
Key point: Most taxpayers aren't troubled by the itemized deduction phaseout rule. Even when applicable, it doesn't make a big difference unless you have a really high income.
Items in both categories are completely disallowed under the alternative minimum tax (AMT) rules. So if you're liable for AMT for the year, you can forget about any write-offs for miscellaneous itemized deduction items.
What's Subject to the 2%-of-AGI Threshold
The 2%-of-AGI deduction threshold applies to the following miscellaneous itemized deduction items:
Job-related expenses. These include job-search costs, though you can deduct costs to search for a new job only in your existing occupation or profession. Unreimbursed employee business expenses also fall in this category. These include:
In addition, you can throw in expenses of having an office in your home if it's maintained for your employer's convenience.
Tax preparation expenses. These include preparation fees you pay your tax adviser.
Other expenses. These items include:
What's Not Subject to the 2%-of-AGI Threshold
You can write off the following miscellaneous expenses without having to worry about the 2%-of-AGI deduction threshold:
Referred to in that last point is income that a deceased person would have collected if he or she continued to live but that wasn't properly included in taxable gross income on the decedent's final Form 1040. Such not-yet-taxed income counts as an asset of the decedent's estate for federal estate tax purposes and can result in an additional estate tax hit. If you inherited an income-in-respect-of-a-decedent item, the miscellaneous deduction for the applicable estate tax could apply to you.
Only the Beginning
Believe it or not, this is only the beginning of many tax-saving miscellaneous itemized deductions worth considering. This article doesn't cover them all. Ask your tax adviser whether you have other expenses that might qualify.