Although the range of acceptable miscellaneous expenses is broad, it's tough to cash in. Most miscellaneous expenses are deductible only to the extent their combined cost exceeds 2% of your adjusted gross income.
Qualifying costs fall in three basic categories:
These are the costs you incur in connection with your job, including such items as automobile expenses, home office expenses, unreimbursed travel, entertainment and gift expenses, the cost of special work clothes, etc. For a complete discussion of employee business expenses, please click on Take Me To, scroll down to Deductions, and click on Employee Business Expenses.
Money you spend in the pursuit of taxable investment income qualifies as a deductible miscellaneous expense, including the following costs:
There is no uncertainty about one kind of investment expense that used to be deductible: The cost of attending an investment convention, seminar or similar meeting. Such write-offs are now forbidden.
If you use a computer to analyze or track your investments, you may include in your miscellaneous expenses an amount for depreciation as long as you keep careful records that break down the amount of time you use the machine for investment versus personal purposes. The depreciation deduction is sure to be modest.
If you have a $3,000 computer that you use 20% of the time on your investments, for example, the first-year depreciation deduction would be just $60. The first-year write-off for a computer not used more than half the time for business is 10% of the qualifying cost. In this example, the qualifying cost is $600 (20% of $3,000). That's not much, but every dollar counts when you're trying to scale the 2% cliff between you and any miscellaneous deductions.
While what you pay for tax advice and return preparation is deductible, the cost is a miscellaneous expense subject to the 2% rule. (If you have your own business or a rental activity, what you pay for tax help for those activities is fully deductible on your Schedule C or Schedule E, respectively.)
Make sure you count every dime you can. If you hire someone to prepare your return, include the cost. If you consult with an accountant about the tax consequences of investments, include the fee. If you wind up in court fighting the IRS over a tax bill, include what you pay your lawyer, as well as all filing fees.
Although legal fees and court costs involved in a divorce are generally considered nondeductible personal expenses, the part of your attorney's bill attributable to tax advice is deductible. If you are receiving alimony, you can deduct the portion of the fee the lawyer ascribed to setting the amount. It's tougher than ever to get any tax savings here, though, since these costs fall into the category of miscellaneous expenses that are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Still, be sure your attorney provides a detailed statement that breaks down his fee so you can tell how much of it may qualify for a deduction.
Count what you pay for a return-preparation manual or other tax-planning books and software—including TaxCut—the cost of long-distance calls to the IRS to answer your tax questions and even the cost of postage to mail in your return. Remember that expenses you incurred in the Spring of 2006 in connection with your 2005 return are deductible on your 2006 return.