6.5 Miscellaneous itemized deductions

Miscellaneous itemized deductions are a complex area of tax law. They're split into two categories: those subject to a 2% AGI floor and those that aren't. Examples include unreimbursed job expenses, tax prep fees, and gambling losses.

The Tax Cuts and Jobs Act of 2017 suspended most miscellaneous itemized deductions until 2025. This change, along with an increased standard deduction, has significantly reduced the number of taxpayers who itemize. Understanding these rules is crucial for tax planning.

Miscellaneous Itemized Deductions

Categories and Examples

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• Miscellaneous itemized deductions divided into two categories subject to 2% of Adjusted Gross Income (AGI) floor and not subject to 2% AGI floor
• Expenses subject to 2% AGI floor include unreimbursed employee expenses (job-related travel, transportation, meals, entertainment, professional dues), tax preparation fees, investment expenses (fees for investment counsel, safe deposit box rentals, subscriptions to financial publications)
• Expenses not subject to 2% AGI floor include gambling losses (to the extent of gambling winnings), casualty and theft losses of income-producing property
• Hobby expenses deductible only to the extent of hobby income and subject to 2% AGI floor
• Certain legal fees related to production or collection of taxable income considered miscellaneous itemized deductions

Additional Considerations

• Documentation crucial for supporting claimed expenses (receipts, mileage logs, other relevant records)
• Expenses must be ordinary and necessary for taxpayer's trade or business to qualify as deductible unreimbursed employee expenses
• 2% of AGI threshold applied to total of all miscellaneous itemized deductions subject to this limit, not each expense individually
• If total miscellaneous itemized deductions do not exceed 2% threshold, no deduction allowed for these expenses
• AGI threshold creates "floor" below which miscellaneous itemized deductions provide no tax benefit
• For high-income taxpayers, 2% threshold can significantly reduce or eliminate benefit of miscellaneous itemized deductions

Impact of Tax Cuts and Jobs Act

Suspension of Deductions

• Tax Cuts and Jobs Act (TCJA) of 2017 suspended all miscellaneous itemized deductions subject to 2% AGI floor for tax years 2018 through 2025
• Suspension affects unreimbursed employee expenses, tax preparation fees, investment expenses
• Miscellaneous itemized deductions not subject to 2% AGI floor (gambling losses) remain deductible under TCJA
• Changes significantly reduced number of taxpayers who itemize deductions due to nearly doubled standard deduction

Effects on Taxpayers

• Loss of miscellaneous itemized deductions offset by increased standard deduction and lower tax rates for many taxpayers
• Suspension has implications for employees who previously deducted significant unreimbursed job-related expenses
• Changes temporary and set to expire after 2025 tax year unless extended by future legislation
• TCJA's impact varies depending on individual taxpayer circumstances (high unreimbursed employee expenses may see increased tax liability)

Calculating Deductible Expenses

Pre-TCJA Calculation Method

• Prior to TCJA, unreimbursed employee expenses deductible to extent they exceeded 2% of taxpayer's AGI when combined with other miscellaneous itemized deductions
• Calculation involves totaling all eligible miscellaneous itemized deductions subject to 2% floor and subtracting 2% of taxpayer's AGI from this total
• Only amount exceeding 2% threshold deductible on Schedule A of Form 1040
• Example calculation:
  • Total miscellaneous itemized deductions: $5,000
  • AGI: $100,000
  • 2% of AGI: $2,000
  • Deductible amount: $5,000 -$2,000 = $3,000

Current Calculation Considerations

• Under current law (post-TCJA), these calculations generally not applicable for tax years 2018-2025 due to suspension of deductions
• For miscellaneous itemized deductions not subject to 2% floor (gambling losses), full amount deductible without reduction
• Example of gambling loss deduction:
  • Gambling winnings: $10,000
  • Gambling losses: $12,000
  • Deductible gambling losses: $10,000 (limited to extent of winnings)

AGI Threshold for Miscellaneous Deductions

Applying the Threshold

• To determine deductible amount, taxpayers must first calculate their AGI, then multiply it by 2% to establish threshold
• Threshold amount subtracted from total miscellaneous itemized deductions to determine allowable deduction
• Example of threshold application:
  • AGI: $75,000
  • 2% threshold: $1,500
  • Total miscellaneous itemized deductions: $2,500
  • Allowable deduction: $2,500 -$1,500 = $1,000

Importance for Tax Planning

• While currently suspended, understanding this threshold remains important for potential future tax planning
• Useful for interpreting pre-2018 tax situations or analyzing impact of potential reinstatement
• Taxpayers with expenses near 2% threshold may benefit from "bunching" deductions in alternate years to maximize tax benefit
• Example of bunching strategy:
  • Year 1: $1,800 in deductions (below 2$2,000, no deduction)
  • Year 2: $3,200 in deductions (exceeds threshold,$1,200 deductible)