What are miscellaneous itemized deductions?

Major tax reform was enacted in December 2017, commonly referred to as the Tax and Jobs Act and many of the following Schedule A itemized deductions which were previously subject to a 2% of adjusted gross income limitation, can no longer be claimed (or are restricted), beginning 2018 through 2025. This means that anyone who claimed itemized deductions to reduce taxable income instead of taking the standard deduction in prior years may find it more beneficial to take the higher standard deduction, based on filing status, for 2018 through 2025.

Examples

Common miscellaneous itemized deductions include:

1)     deductions for interest used in the production of income:  For example, interest for money you borrowed to pay an attorney to collect a personal debt.

2)      unreimbursed employee job expenses: This category includes courses you take to upgrade your job skills, seminars, vocational courses, refresher courses; professional books; work clothes; business travel that is unreimbursed; dues to a professional associations.  None of these are deductible starting in 2018 and expiring 2025.

3)     casualty and theft losses:  Any losses not covered by insurance and subject to a 10% floor.  This deduction is retained for tax years 2018 through 2025 but only for losses incurred in a federally declared disaster area.

4)     gambling losses:  To the extent of gambling winnings that you have reported as income on the same return. This was slightly modified for tax years 2018 through 2025.

5)      safe deposit box rental. This deduction is gone for 2018 through 2025.

6)      tax preparation fees:  You can deduct your tax preparation fee or the cost of your tax preparation software, electronic filing fees and tax publications. These expenses are no longer deductible for 2018-2025.

7)      union dues. These can no longer be deducted for 2018 through 2025.

8)      investment expenses:  fees paid for personal investing (i.e., advisory and management fees) are also gone for 2018-2025.

9)      legal fees: there is no deduction for legal fees, unless the fees involve the taxpayer’s business, discrimination suits or certain whistleblower awards (in which event they are an “above-the-line” deduction and reported on Schedule 1, Form 1040).

Many people do not have sufficient itemized deductions to reach a level that is higher than their standard deduction.  Therefore, they are better off claiming the standard deduction.

Prior to the changes made by the 2017 Tax Cuts and Jobs Act, employee business expenses, which were included in miscellaneous itemized deductions, were a hot topic with the IRS as there has been a large amount of tax fraud associated with deductions for employee business expenses.  For example, if you claimed business miles that your employer was also reimbursing, that would be tax fraud.  Therefore, if you are taking deductions for employee business expenses it is critical to ensure that you have solid documentation for those expenses.  Documentation would include a properly filled out mileage log, receipts for meals, travel, parking and tolls, and receipts for work clothing.

Case Studies: Exploring Miscellaneous Itemized Deductions

Case Study 1: Unreimbursed Employee Job Expenses

John, an employee, used to claim deductions for unreimbursed job expenses on his tax returns. This included expenses for professional courses, work-related travel, and dues to professional associations. However, due to changes in tax laws, starting from 2018 through 2025, these deductions are no longer allowed. John had to adjust his tax strategy accordingly and opt for the standard deduction instead.

Case Study 2: Casualty and Theft Losses

Sarah experienced a theft at her home, resulting in financial losses. In the past, she could deduct the unrecovered losses not covered by insurance, subject to a 10% floor. However, under the revised tax laws, starting from 2018 through 2025, casualty and theft losses are only deductible if they occurred in a federally declared disaster area. Sarah had to adjust her expectations and seek alternative means of financial recovery.

Case Study 3: Investment Expenses

Lisa had significant investment activities and used to deduct fees paid for personal investing, such as advisory and management fees. However, the 2017 Tax Cuts and Jobs Act brought changes to the tax landscape, disallowing the deduction of investment expenses from 2018 through 2025. Lisa had to reconsider her investment strategy and account for the eliminated deduction in her financial planning.