The categories of itemized deductions you can claim on Schedule A of Form 1040 include Medical and Dental Expenses, Taxes, Interest, Gifts to Charity, Casualty and Theft Losses, Job Expenses and Most Other Miscellaneous Deductions, and finally, Other Miscellaneous Deductions.  Job Expenses and Most Other Miscellaneous Deductions are subject to the 2% of adjusted-gross-income (AGI) limit.  That is, they are deductible to the extent their total exceeds 2% of your adjusted gross income.  But expenses in the last category, Other Miscellaneous Deductions, are not subject to the limit.

Itemized Deductions Subject to 2% of AGI Limit

There are three categories of deductions subject to the 2% of adjusted-gross-income limit:

• Un-reimbursed employee expenses, reported on line 20 of Schedule A,
• Tax preparation fees, on line 21, and
• Other expenses, on line 22.

The total of these three lines is then compared to 2% of your adjusted gross income, and the excess is the amount deductible.  After this group of deductions, there is another line on Schedule A for Other Miscellaneous Deductions (line 27), which are not subject to the limit.

Tax Preparation Fees

Any taxpayer who itemizes deductions can claim a deduction for the amount paid to have his or her income tax return prepared.  This includes the cost of tax preparation software programs and tax publications.  It also includes any fee paid for electronic filing.  If you paid to have certain tax schedules related to your business or income-producing activity prepared, and you can identify that amount, you should deduct the cost of preparing that schedule (C or C-EZ, E or F, for example) as part of the expenses you report on that particular schedule.  This way the expense would be fully deductible and not subject to the 2% of AGI limitation.  Any remaining amount of your tax preparation fees that are not specifically allocable to a particular tax schedule can be claimed as an itemized deduction on line 21 of Schedule A.

Other Expenses

Other expenses on line 22 of Schedule A include:

1. Amounts you pay to produce or collect income that you have to include in your gross income for federal income tax purposes,
2. Expenses incurred in managing, conserving, or maintaining your income-producing property, and
3. Expenses related to your federal income tax liability itself, including amounts paid to determine the amount of tax you have to pay, to contest that amount, to pay the tax, or to claim a tax refund.

The expenses that you can deduct for the first two categories above must be “reasonably and closely related to these purposes”.  You should enter the total amount you paid to produce or collect taxable income and manage or protect property held for earning income and list the type and amount of each expense on the dotted lines next to line 22.  The following are descriptions of the types of expenses that qualify for deduction as other expenses subject to the 2% of adjusted-gross-income limit.

You can deduct office rent and expenses, and clerical help for managing your investments and collecting your taxable income.  These expenses include depreciation on your home computer if you use it to manage your investments.  You can deduct the rental you pay for a safe deposit box if you use it to store stock certificates, bonds, or other documents and papers relating to property that produces taxable income.  If you use the safe deposit box only to store jewelry or other personal items, the rental is not deductible.

Investment fees, custodial fees, trust management fees and other charges for managing your investments are deductible.  So are fees paid to brokers, trustees, or other agents to collect dividends and interest.  But you cannot deduct fees paid to brokers to buy or sell securities or other investment property.  Fees paid to buy securities or investment property should be added to the basis of the property.  Fees paid to sell the property are treated as selling expenses in determining the gain or loss on the sale.

If you subscribe to a dividend reinvestment plan, you can deduct the service charges you pay for holding the shares you acquire through the plan, calculating and reinvesting cash dividends, and keeping records and providing statements.  Trustees’ fees for your IRA are deductible if they are separately billed and paid.

You can claim the indirect miscellaneous deductions of pass-through entities such as partnerships, S-corporations, and mutual funds that are not publicly traded.  An investment club formed solely to trade in securities is treated as a partnership for this purpose, and you can deduct your share of the club’s (partnership’s) operating expenses.  In the case of a publicly traded mutual fund, your share of investment expenses are offset against your gross dividend income and the net amount you have to report as dividend income is reported on Form 1099-DIV.  A non-publicly traded mutual fund will send you a Form 1099-DIV showing your share of gross income and investment expenses.  In this case you can deduct your share of investment expenses as a miscellaneous itemized deduction.  Partnerships and S-corporations report your share of income and expenses on Form K-1.

Legal fees and expenses are deductible if they are related to producing or collecting taxable income.  You can also deduct legal expenses you pay in connection with determining how much tax you owe, legal expenses you incur in a tax collection process, and in obtaining a tax refund.  Legal expenses related to resolving specific tax issues can be deducted on the appropriate tax schedule, for example, legal expenses can be deducted on Schedule C if they are associated with a trade or business, on Schedule E if they relate to rents, royalties or income from a partnership or subchapter S corporation, and on Schedule F if they relate to income from farming.  Legal expenses for resolving tax issues that are not related to business can be taken as a miscellaneous itemized deduction on Schedule A.

As an employee, you can deduct legal costs incurred in order to keep your job, for example, in defending yourself against charges related to your trade or business.  If you are involved in a case of unlawful discrimination on your job, you may be able to deduct your attorney fees and other legal costs as an adjustment to income rather than as a miscellaneous itemized deduction.

The cost of tax advice related to divorce is deductible, if you can separate this from the legal cost of the divorce itself, which is a non-deductible personal expense.  And, you can deduct legal costs incurred to collect alimony, since alimony is taxable income.

You can claim a miscellaneous deduction for casualty and theft losses on damaged or stolen property you use in performing services as an employee.  You will first need to complete Form 4684, Casualties and Thefts, and if you have to file Form 4797, Sales of Business Property, you may also have to report the loss on that form.  Appraisal fees to determine the amount that can be taken as a deduction for a casualty loss, or to determine the fair market value of a charitable contribution in the form of property, can also be deducted.

If you have a deposit in a bank or financial institution that goes bankrupt or becomes insolvent, and the deposit is not federally insured, you can claim your loss as a miscellaneous itemized deduction (limited to $20,000, or $10,000 if you are married filing separately), or you can claim a casualty loss.  If part of the deposit is federally insured, you can only claim a casualty loss.  You can claim the deduction when you can reasonably estimate the amount of the loss.  Then later, if your actual loss is less than your estimated loss, you have to include the difference in your income as a recovery.  If the actual amount of the loss is more than estimated, or if you do not deduct the loss until you know what the actual amount is, you treat the loss as a non-business bad debt, deductible as a short-term capital loss.

If you have to repay an amount that you had previously included in income, you can deduct the repayment as a miscellaneous itemized deduction if the repayment is made under a claim of right of $3,000 or less.  Repayments over $3,000 would be deductible as Other Miscellaneous Deductions not subject to the 2% of AGI limit.  You can claim a deduction for repayment of social security benefits if you have a negative amount reported in box 5 of the Form SSA-1099, Social Security Benefit Statement, or Form RRB-1099, Payments by the Railroad Retirement Board, you received.

Other Miscellaneous Deductions Not Subject to 2% Limit

Other miscellaneous deductions that are not subject to the 2% of AGI limit are reported on line 27 of Schedule A.  The following are expenses that fit into this category.

You can deduct the amortizable premium on bonds.  The bond premium is the excess you pay for the bond over its stated principal amount.  Normally the premium is amortized as an offset against interest income on the bond.  But the amortization of the premium on bonds acquired on or before October 23, 1986 is treated as a miscellaneous itemized deduction, not subject to the 2% of AGI limit.  The amortization of premium on bonds acquired after October 22, 1986 but before 1988 is treated as investment interest expense, subject to the limits that apply on investment interest.  If you chose to amortize the premiums on taxable bonds you acquired before 1998, you can deduct the amount of bond premium amortization that exceeds your interest income only for bonds you acquired during 1998 and later.

Casualty and theft losses from income-producing property, such as securities, works of art, precious metals, and vacant lots can be taken as a miscellaneous deduction.  You would first have to report the loss on Form 4684, and if you have to file Form 4797, you would also include it there.  There are different types of deductions for casualties and thefts:

• The casualty and theft losses reported here under miscellaneous deductions not subject to the 2% of AGI limit are on income-producing property, or property held for investment.
• The losses mentioned above, that are subject to the 2% of AGI limit, are casualty and theft losses on property used to perform your services as an employee.
• Casualty and theft losses on personal property, if they qualify, would be deductible in the separate category of itemized deductions for casualty and theft losses.
• Business casualties and thefts would be reported on Form 4797.

Gambling losses are deductible up to the amount of gambling winnings.  You cannot report a net loss from gambling for tax purposes.  Also, you cannot net your gambling winnings and losses and report the difference.  You must report your gambling winnings as Other Income on Form 1040, and deduct your losses here, as a miscellaneous deduction not subject to the 2% of AGI limit.  You should therefore keep separate records of your gambling winnings and losses.

Impairment-related work expenses of persons with disabilities can be deducted here.  If you have expenses that you incur in order to be able to work, despite a physical or mental disability that would limit your ability to be employed or that limits a major life activity, you can claim a deduction for those expenses.  If you are an employee, you would first report these expenses on Form 2106 or 2106-EZ.  Your employee expenses related to your impairment would be reported here as a miscellaneous deduction not subject to the 2% of AGI limit, and employee expenses not related to your impairment would be reported as un-reimbursed employee expenses on line 20 of Schedule A.

Amounts that you had to repay under a claim of right, and that you had previously included in taxable income, are reported here, to the extent they exceed $3,000.  The first $3,000 of repayments are deductible as a miscellaneous itemized deduction subject to the 2% of AGI limit on line 22 of Schedule A, as mentioned above.

A miscellaneous deduction can be claimed for the un-recovered investment in an annuity.  A retiree who is receiving an annuity can exclude from taxable income the portion of each annuity payment that represents a return of the retiree’s cost, or investment in the annuity.  If the retiree dies before recovering the entire cost, the difference can be claimed as a miscellaneous itemized deduction.