Q: Tax Playa, I already know about the major itemized deductions I can claim (catastrophic medical expenses, state and local taxes, mortgage interest, charitable deductions, and casualty losses). Are there any other small itemized deductions I should be on the lookout for?
David, Falls Church VA
A: There are a host of other deductions itemizing taxpayers are technically eligible for. They will find, however, that the hoops needed to jump through in order to get them make targeting them not worth the effort...
For more information on this, please see IRS Publication 529, Miscellaneous Expenses.
First, the basics.
70% of taxpayers don't itemize their deductions. Rather, they take the standard deduction. In my experience, only three categories of taxpayers itemize:
- Married filing separately filers. The rule is that if one spouse itemizes, the other must, too.
- Households in the first 15 years or so of a mortgage.
- People who tithe their income to a church.
Therefore, this discussion probably doesn't concern you if you don't fit into one of those three categories.
For those 1/3rd or so of households that do itemize, the major deductions are well-understood: mortgage interest, state and local taxes, charitable contributions. A few unlucky souls will also have catastrophic medical expenses (those in excess of 7.5% of AGI) or casualty losses (those in excess of 10% of AGI plus $100).
There are also smaller, "miscellaneous" itemized deductions. Some of these can be taken without any further limitations, though you rarely encounter them. They include:
- Amortizable premiums on taxable bonds
- Casualty and theft losses from income-producing property
- Federal estate tax with respect to a decedent
- Gambling losses, but only to cancel out gambling winnings reported on the 1040
- Impairment-related work expenses of persons with disabilities
- Losses from "other" activities of electing large partnerships
- Repayments of more than $3000 under a claim of right
- Unrecovered investment in an annuity
Needless to say, these aren't commonplace. The only one most people are likely to see is gambling losses to cancel out winnings (for more on this see the topic on gambling to the right).
There is a second category of "miscellaneous deductions" which are easier to have, but more difficult to qualify for. These deductions must be added together, and then 2% of AGI subtracted from the total. Whatever is left (if anything) is deductible. Miscellaneous itemized deductions subject to the 2% of AGI floor include:
- Unreimbursed employee business expenses. These are ordinary and necessary business costs you incur as an employee and for which you were not reimbursed by your employer. Some common examples of these include subscriptions, business travel, business meals, local business transportation, professional association dues, job hunting expenses if in the same profession, and union dues. There are many others, but these are the most common. It's also important to note that armed forces reservists, teachers, performing artists, and fee-based state and local government officials can often claim their expenses without itemizing (that is, as an adjustment to income).
- Tax preparation fees.
- Other expenses to produce or collect taxable income. Common examples here include hobby expenses to cancel out hobby income, investment fees, legal fees related to taxable income, loss on an IRA if the account has been liquidated, and IRA fees.
For most people, the 2% of AGI floor is too high a barrier to overcome. That's why a good strategy is to "bunch" these deductions into odd or even years, and pay for two year's worth every other year. The odds of overcoming the floor are greater this way.