Nathan Cummins, CPA

Last year, did you take the standard deduction, or did you itemize?  In order to maximize your allowable deductions each year, it is important to analyze your expenses each year to determine which option will be most beneficial.

To determine if you could benefit from itemizing, add your potential deductions, reduced by any imposed floor or ceiling, and compare the amount to your allowed standard deduction (single- $5,800, MFJ- $11,600).  For example, medical expenses are deductible to the point that they exceed 7.5% of your AGI.  Charitable contributions are deductible up to 50% of your AGI.  Home mortgage interest is deductible on mortgages up to $1 million.  State income or sales taxes are deductible without any floor or ceiling.  In addition to these well-known deductions, there are more obscure miscellaneous deductions that you should consider.

There are two categories of miscellaneous deductions: those that are subject to a 2% of Adjusted Gross Income (AGI) floor, and those not subject to the floor.  The 2% floor means that the expenses are deductible only to the point that they exceed 2% of your AGI, which is reported on your Form 1040, line 37.  Deductions subject to the 2% floor include tax preparation fees, expenses to determine, contest, pay or claim a tax refund, unreimbursed employee expenses and other expenses related to the production of taxable income.  Tax preparation expenses can be deducted in the year of payment.  For example, the tax preparation fees for your 2009 return would be paid in 2010, and, therefore, the deduction can be recognized on your 2010 return.  Unreimbursed employee expenses are deductible only if they are (1) paid during the year, (2) made to carry out your trade or business of being an employee, and (3) ordinary and necessary.  An expense is considered “necessary” if it is appropriate and helpful to your business; it need not be required.  Examples of deductible expenses include dues to professional societies, home office deductions, job search expenses, professional licensing fees, malpractice insurance premiums, medical exams required by an employer, passport for a business trip, tools and supplies used in your work, subscriptions to professional journals and trade magazines, and travel and meals related to your work.  Other expenses incurred in order to produce or collect taxable income would include investment fees and expenses, legal expenses to collect income, fees for tax advice, and hobby expenses (although they are usually only deductible up to hobby income).

Deductions not subject to the 2% floor include gambling losses (deductible up to gambling winnings), losses from ponzi schemes, amortizable premium on taxable bond investments, unrecovered investment in an annuity, casualty or theft losses of income-producing property, and repayments of over $3,000 previously taxed under the “claim of right” doctrine.

The IRS also provides a list, though not exhaustive, of nondeductible expenses.  Political contributions, personal legal expenses, meals while working late, meals with coworkers, home security systems, tickets and fines, check-writing fees, club dues, and commuting expenses are specific examples of non-deductible expenses.  In addition, the IRS specifically disallows the deduction of expenses related to the production of non-taxable income.  For example, investment and custodial fees related to investments that produce taxable income are deductible, but the same fees for a tax-exempt bond investment would be nondeductible.

If you want more information about maximizing your allowable deductions, please feel free to give us a call. We are happy to answer any questions.