Tax Matters

Correctly identifying miscellaneous itemized deductions

By David Katzman

Did you spend money in 2007 that you think should be deductible, but you’re just not sure where to list it on your federal income tax return? These expenses may qualify as a miscellaneous itemized deduction.

Miscellaneous itemized deductions are fairly comprehensive and widely varied—and they can serve to lower your tax bill, if you track them carefully. These deductions include, but are not limited to:

• A variety of business-related costs, such as travel expenses or any expenses required to do your job, may qualify. These expenses must be considered “ordinary and necessary,” and they are not deductible if you are reimbursed by your employer. Some specific examples include employer required medical exams; uniforms, if they are an unreimbursed expense and not suitable to wear outside work; courses taken to improve your skills in your current field, skills acquired to get work in a new field do not qualify; and the cost of job hunting, if you are looking for work.
• Home office expenses are also deductible, if you meet certain qualifying criteria. For example, if you maintain a home office for the convenience of your employer, not just to eliminate your own commuting costs, then some of those expenses are deductible.
• Tax preparation costs, including the cost of an accountant, a software program, the cost of copying charges and postage, or other necessary expenses. 
• Investment expenses, such as fees paid to a financial advisor; subscription costs for investment publications; depreciation for your home computer, if it is used to track and manage your investments; or even the cost of your safe deposit box, if it is used exclusively to hold investment data.
• Hobby expenses are not deductible, unless you have turned your hobby into an income-producing activity. If you do make money from your hobby, you can deduct related expenses up to the amount of the payments you receive.

While miscellaneous itemized deductions sound like a catchall category where you can find deductions for a wide variety of expenses, there is one major caveat. The Internal Revenue Service (IRS) imposes a significant restriction on these deductions called the two percent rule. You are allowed to deduct your miscellaneous itemized deductions only if they total more than two percent of your adjusted gross income (AGI).

Here’s an example: If your AGI is $100,000, two percent would be $2,000. Your miscellaneous itemized deductions must exceed $2,000 before they will help lower your tax bill. Even then, only the amount over the minimum is deductible. If your miscellaneous itemized deductions total $2,750, just $750 can be claimed as a deduction.