30. Miscellaneous Deductions
Important Reminder
Limit on itemized deductions. For 2002, if your
adjusted gross income is more than $137,300 ($68,650 if you are married filing
separately), you may have to reduce the amount of certain itemized deductions,
including most miscellaneous deductions.
Introduction
This chapter explains which expenses you can claim as miscellaneous itemized deductions
on Schedule A (Form 1040). You must reduce the total of most miscellaneous itemized
deductions by 2% of your adjusted gross income. This chapter covers the following topics.
- Deductions subject to the 2% limit.
- Deductions not subject to the 2% limit.
- Expenses you cannot deduct.
 You must keep
records to verify your deductions. You should keep receipts, canceled checks, financial
account statements, and other documentary evidence. For more information on recordkeeping,
get Publication 552, Recordkeeping for Individuals.
Useful Items
You may want to see:
Publication
- 529 Miscellaneous Deductions
- 535 Business Expenses
- 587 Business Use of Your Home (Including Use by Day-Care Providers)
- 946 How To Depreciate Property
Form (and Instructions)
- 2106 Employee Business Expenses
- 2106-EZ Unreimbursed Employee Business Expenses
Deductions Subject
to the 2% Limit
You can deduct certain expenses as miscellaneous itemized deductions
on Schedule A (Form 1040). You can claim the amount of expenses that is more than
2% of your adjusted gross income. You figure your deduction on Schedule A by subtracting
2% of your adjusted gross income from the total amount of these expenses. Your adjusted
gross income is the amount on line 36, Form 1040.
Generally, you apply the 2% limit after you apply any other deduction limit. For
example, you apply the 50% (or 65%) limit on business-related meals and entertainment
(discussed in chapter 28) before you apply the 2% limit.
Deductions subject to the 2% limit are discussed in the three categories in which you
report them on Schedule A.
- Unreimbursed employee expenses (line 20).
- Tax preparation fees (line 21).
- Other expenses (line 22).
Impairment-related work expenses. If you have a physical or mental
disability, certain expenses you incur that allow you to work may not be subject to the 2%
limit. See Impairment-Related Work Expenses under Deductions Not Subject to
the 2% Limit, later.
Performing artists. If you are
a qualified performing artist, you may be able to deduct your employee business expenses
as an adjustment to income rather than as a miscellaneous itemized deduction. See Special
Rules in chapter 28 if you need more information about this exception.
State and local government officials paid on a fee basis. If you performed services as an employee of a state or
local government and you were paid in whole or in part on a fee basis, you can claim your
trade or business expenses in performing those services as an adjustment to income, rather
than as a miscellaneous deduction. See Officials Paid on a Fee Basis under Deductions
Not Subject to the 2% Limit, later.
Unreimbursed
Employee Expenses
(Line 20)
You can deduct only unreimbursed employee expenses that are:
- Paid or incurred during your tax year,
- For carrying on your trade or business of being an employee, and
- Ordinary and necessary.
An expense is ordinary if it is common and accepted in your type of
trade or business. An expense is necessary if it is appropriate and
helpful to your trade or business.
Examples of unreimbursed employee expenses are listed next. The list is followed by
discussions of additional unreimbursed employee expenses.
- Business bad debt of an employee.
- Education that is work related. (See chapter 29.)
- Legal fees related to your job.
- Licenses and regulatory fees.
- Malpractice insurance premiums.
- Medical examinations required by an employer.
- Occupational taxes.
- Passport for a business trip.
- Subscriptions to professional journals and trade magazines related to your work.
- Travel, transportation, entertainment, gift, and car expenses related to your work. (See
chapter 28.)
Business Liability Insurance
You can deduct insurance premiums you paid for protection against
personal liability for wrongful acts on the job.
Damages for Breach
of Employment Contract
If you break an employment contract, you can deduct damages you pay
your former employer if the damages are attributable to the pay you received from
that employer.
Depreciation on Computers
or Cellular Telephones
You can claim a depreciation deduction for a computer or cellular
telephone that you use in your work as an employee if its use is:
- For the convenience of your employer, and
- Required as a condition of your employment.
For more information about the rules and exceptions to the rules affecting the
allowable deductions for a home computer or cellular telephone, see Publication 529.
Dues to Chambers of Commerce and Professional Societies
You may be able to deduct dues paid to professional organizations
(such as bar associations and medical associations) and to chambers of commerce and
similar organizations, if membership helps you carry out the duties of your job. Similar
organizations include:
- Boards of trade,
- Business leagues,
- Civic or public service organizations,
- Real estate boards, and
- Trade associations.
You cannot deduct dues paid to an organization if one of its main
purposes is to:
- Conduct entertainment activities for members or their guests, or
- Provide members or their guests with access to entertainment facilities.
Dues paid to airline, hotel, and luncheon clubs are not deductible. See Club Dues under
Nondeductible Expenses, later.
Lobbying and political activities. You may not be able to deduct
that part of your dues that is for certain lobbying and political activities. See Dues
used for lobbying under Lobbying Expenses, later.
Home Office
If you use a part of your home regularly and exclusively for business
purposes, you may be able to deduct a part of the operating expenses and
depreciation of your home.
You can claim this deduction for the business use of a part of your home only if you
use that part of your home regularly and exclusively:
- As your principal place of business for any trade or business,
- As a place to meet or deal with your patients, clients, or customers in the normal
course of your trade or business, or
- In the case of a separate structure not attached to your home, in connection with your
trade or business.
The regular and exclusive business use must be for the convenience of your
employer and not just appropriate and helpful in your job. Get Publication 587
for more detailed information and a worksheet.
Job Search Expenses
You can deduct certain expenses you have in looking for a new job in
your present occupation, even if you do not get a new job.
You cannot deduct job search expenses if:
- You are looking for a job in a new occupation,
- There was a substantial break between the ending of your last job and your looking for a
new one, or
- You are looking for a job for the first time.
Employment and outplacement agency fees. You can
deduct employment and outplacement agency fees you pay in looking for a new job in your
present occupation.
Employer pays you back. If, in a later year, your employer
pays you back for employment agency fees, you must include the amount you receive in your
gross income up to the amount of your tax benefit in the earlier year. (See Recoveries
in chapter 13.)
Employer pays the employment agency. If your employer pays
the fees directly to the employment agency and you are not responsible for them, you do
not include them in your gross income.
Résumé. You can deduct
amounts you spend for typing, printing, and mailing copies of a résumé to prospective
employers if you are looking for a new job in your present occupation.
Travel and transportation expenses. If you travel to an area and, while there, you look for a new job in your
present occupation, you may be able to deduct travel expenses to and from the area.
You can deduct the travel expenses if the trip is primarily to look for a new job. The
amount of time you spend on personal activity compared to the amount of time you spend in
looking for work is important in determining whether the trip is primarily personal or is
primarily to look for a new job.
Even if you cannot deduct the travel expenses to and from an area, you can deduct the
expenses of looking for a new job in your present occupation while in the area.
You may choose to use the standard mileage rate to figure your car expenses. The
standard mileage rate for 2002 is 36˝ cents per mile. See chapter 28 for more
information.
Licenses and Regulatory Fees
You can deduct the amount you pay each year to state or local governments for licenses
and regulatory fees for your trade, business, or profession.
Occupational Taxes
You can deduct an occupational tax charged at a flat rate by a locality for the
privilege of working or conducting a business in the locality. If you are an employee, you
can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit;
you cannot claim them as a deduction for taxes elsewhere on your return.
Repayment of
Income Aid Payment
An income aid payment is one that is received under an employer's plan to aid
employees who lose their jobs because of lack of work. If you repay a lump-sum income aid
payment that you received and included in income in an earlier year, you can deduct the
repayment.
Research Expenses of
a College Professor
If you are a college professor, you can deduct research expenses, including travel
expenses, for teaching, lecturing, or writing and publishing on subjects that relate
directly to the field of your teaching duties. You must have undertaken the research as a
means of carrying out the duties expected of a professor and without expectation of profit
apart from salary. However, you cannot deduct the cost of travel as a form of education.
Tools Used in Your Work
Generally, you can deduct amounts you spend for tools used in your
work if the tools wear out and are thrown away within 1 year from the date of
purchase. You can depreciate the cost of tools that have a useful life substantially
beyond the tax year. For more information about depreciation, get Publication 946.
Union Dues and Expenses
You can deduct dues and initiation fees you pay for union membership.
You can also deduct assessments for benefit
payments to unemployed union members. However, you cannot deduct the part of the
assessments or contributions that provides funds for the payment of sick, accident, or
death benefits. Also, you cannot deduct contributions to a pension fund, even if the union
requires you to make the contributions.
You may not be able to deduct amounts you pay to the union that are related to certain
lobbying and political activities. See Lobbying Expenses under Nondeductible
Expenses, later.
Work Clothes and Uniforms
You can deduct the cost and upkeep of work clothes if the following
two requirements are met.
- You must wear them as a condition of your employment.
- The clothes are not suitable for everyday wear.
 It is not
enough that you wear distinctive clothing. The clothing must be specifically required by
your employer. Nor is it enough that you do not, in fact, wear your work clothes away from
work. The clothing must not be suitable for taking the place of your regular clothing.
Examples of workers who may be able to deduct the cost and upkeep of work clothes are:
delivery workers, firefighters, health care workers, law enforcement officers, letter
carriers, professional athletes, and transportation workers (air, rail, bus, etc.).
Musicians and entertainers can deduct the cost of theatrical clothing
and accessories if they are not suitable for everyday wear.
However, work clothing consisting of white cap, white shirt or white jacket, white bib
overalls, and standard work shoes, which a painter is required by his union to wear on the
job, is not distinctive in character or in the nature of a uniform. Similarly, the costs
of buying and maintaining blue work clothes worn by a welder at the request of a foreman
are not deductible.
Protective clothing. You can
deduct the cost of protective clothing required in your work, such as safety shoes or
boots, safety glasses, hard hats, and work gloves.
Examples of workers who may be required to wear safety items are: carpenters, cement
workers, chemical workers, electricians, fishing boat crew members, machinists, oil field
workers, pipe fitters, steamfitters, and truck drivers.
Military uniforms. You
generally cannot deduct the cost of your uniforms if you are on full-time active duty in
the armed forces. However, if you are an armed forces reservist, you can deduct the
unreimbursed cost of your uniform if military regulations restrict you from wearing it
except while on duty as a reservist. In figuring the deduction, you must reduce the cost
by any nontaxable allowance you receive for these expenses.
If local military rules do not allow you to wear fatigue uniforms when you are off
duty, you can deduct the amount by which the cost of buying and keeping up these uniforms
is more than the uniform allowance you receive.
You can deduct the cost of your uniforms if you are a civilian faculty or staff member
of a military school.
Tax Preparation Fees
(Line 21)
You can usually deduct tax preparation fees in the year you pay them.
Thus, on your 2002 return, you can deduct fees paid in 2002 for preparing your 2001
return. These fees include the cost of tax preparation software programs and tax
publications. They also include any fee you paid for electronic filing of your return.
Deduct expenses of preparing tax schedules relating to profit or loss from business
(Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses
(Schedule F) on the appropriate schedule. Deduct the expenses of preparing the remainder
of the return on line 21, Schedule A (Form 1040).
Other Expenses (Line 22)
You can deduct certain other expenses as miscellaneous itemized
deductions subject to the 2%-of-adjusted-gross-income limit. These are expenses you
pay:
- To produce or collect income that must be included in your gross income,
- To manage, conserve, or maintain property held for producing such income, or
- To determine, contest, pay, or claim a refund of any tax.
You can deduct expenses you pay for the purposes in (1) and (2) above only if they are
reasonably and closely related to these purposes. Some of these other expenses are
explained in the following discussions.
If the expenses you pay produce income that is only partially taxable, see Tax-Exempt
Income Expenses, later, under Nondeductible Expenses.
Appraisal Fees
You can deduct appraisal fees if you pay them to figure a casualty
loss or the fair market value of donated property.
Certain Casualty and
Theft Losses
You can deduct a casualty or theft loss as a miscellaneous itemized
deduction subject to the 2% limit if you used the damaged or stolen property in
performing services as an employee. First report the loss in Section B of Form 4684, Casualties
and Thefts. You may also have to include the loss on Form 4797, Sales of Business
Property, if you are otherwise required to file that form. Your deduction is the
amount of the loss included on lines 32 and 38b of Form 4684 and line 18b(1) of Form 4797.
For other casualty and theft losses, see chapter 27.
Clerical Help and Office Rent
You can deduct office expenses, such as rent and clerical help, that
you have in connection with your investments and collecting the taxable income on
them.
Depreciation on
Home Computer
You can deduct depreciation on your home computer if you use it to
produce income (for example, to manage your investments that produce taxable
income). You generally must depreciate the computer using the straight line method over
the Alternative Depreciation System (ADS) recovery period. But if you work as an employee
and also use the computer in that work, see Publication 946.
Excess Deductions of an Estate
If an estate's total deductions in its last tax year are more than its gross income for
that year, the beneficiaries succeeding to the estate's property can deduct the excess. Do
not include deductions for the estate's personal exemption and charitable contributions
when figuring the estate's total deductions. The beneficiaries can claim the deduction
only for the tax year in which, or with which, the estate terminates, whether the year of
termination is a normal year or a short tax year. For more information, see Termination
of Estate in Publication 559, Survivors, Executors, and Administrators.
Fees to Collect
Interest and Dividends
You can deduct fees you pay to a broker, bank, trustee, or similar
agent to collect your taxable bond interest or dividends on shares of stock. But
you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or
bonds. You must add the fee to the cost of the property.
You cannot deduct the fee you pay to a broker to sell securities. You can use the fee
only to figure gain or loss from the sale. See the instructions for columns (d) and (e) of
Schedule D (Form 1040) for information on how to report the fee.
Hobby Expenses
You can generally deduct hobby expenses, but only up to the amount of
hobby income. A hobby is not a business because it is not carried on to make a
profit. See Activity not for profit in chapter 13 under Other Income.
Indirect Deductions of
Pass-Through Entities
Pass-through entities include partnerships, S corporations, and
mutual funds that are not publicly offered. Deductions of pass-through entities are
passed through to the partners or shareholders. The partners or shareholders can deduct
their share of passed-through deductions for investment expenses as miscellaneous itemized
deductions subject to the 2% limit.
Example. You are a member of an investment club that is formed
solely to invest in securities. The club is treated as a partnership. The partnership's
income is solely from taxable dividends, interest, and gains from sales of securities. In
this case, you can deduct your share of the partnership's operating expenses as
miscellaneous itemized deductions subject to the 2% limit. However, if the investment club
partnership has investments that also produce nontaxable income, you cannot deduct your
share of the partnership's expenses that produce the nontaxable income.
Publicly offered mutual funds. Publicly
offered mutual funds do not pass deductions for investment expenses through to
shareholders. A mutual fund is publicly offered if it is:
- Continuously offered pursuant to a public offering,
- Regularly traded on an established securities market, or
- Held by or for at least 500 persons at all times during the tax year.
A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and
Distributions, or a substitute form, showing the net amount of dividend income (gross
dividends minus investment expenses). This net figure is the amount you report on your
return as income. You cannot deduct investment expenses.
Information returns. You should receive information returns from
pass-through entities.
Partnerships and S corporations. These entities issue
Schedule K-1, which lists the items and amounts you must report and identifies the tax
return schedules and lines to use.
Nonpublicly offered mutual funds. These funds will send you a Form 1099-DIV, or a substitute form, showing your
share of gross income and investment expenses. You can claim the expenses only as a
miscellaneous itemized deduction subject to the 2% limit.
Investment Fees and Expenses
You can deduct investment fees, custodial fees, trust administration
fees, and other expenses you paid for managing your investments that produce
taxable income.
Legal Expenses
You can usually deduct legal expenses that you incur in attempting to
produce or collect taxable income or that you pay in connection with the
determination, collection, or refund of any tax.
You can also deduct legal expenses that are:
- Related to either doing or keeping your job, such as those you paid to defend yourself
against criminal charges arising out of your trade or business,
- For tax advice related to a divorce if the bill specifies how much is for tax advice and
it is determined in a reasonable way, or
- To collect taxable alimony.
You can deduct expenses of resolving tax issues relating to profit or loss from
business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and
expenses (Schedule F) on the appropriate schedule. You deduct expenses of resolving
nonbusiness tax issues on Schedule A (Form 1040).
Loss on Deposits
For information on whether, and if so, how, you may deduct a loss on your deposit in a
qualified financial institution, see Deposit in Insolvent or Bankrupt Financial
Institution in chapter 15.
Repayments of Income
If you had to repay an amount that you included in income in an earlier year, you may
be able to deduct the amount you repaid. If the amount you had to repay was ordinary
income of $3,000 or less, the deduction is subject to the 2% limit. If it was more than
$3,000, see Repayments Under Claim of Right under Deductions Not Subject to
the 2% Limit, later.
Repayments of
Social Security Benefits
For information on how to deduct your repayments of certain social
security benefits, see Repayments More Than Gross Benefits in chapter 12.
Safe Deposit Box Rent
You can deduct safe deposit box rent if you use the box to store
taxable income-producing stocks, bonds, or investment-related papers and documents.
You cannot deduct the rent if you use the box only for jewelry, other personal items, or
tax-exempt securities.
Service Charges on
Dividend Reinvestment Plans
You can deduct service charges you pay as a subscriber in a dividend
reinvestment plan. These service charges include payments for:
- Holding shares acquired through a plan,
- Collecting and reinvesting cash dividends, and
- Keeping individual records and providing detailed statements of accounts.
Trustee's Administrative
Fees for IRA
Trustee's administrative fees that are billed separately and paid by
you in connection with your individual retirement arrangement (IRA) are deductible
(if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the
2% limit. For more information about IRAs, see chapter 18.
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