If you are getting ready to file your tax return, make sure you have claimed all the deductions that you’re due. Most Americans know they can deduct items such as charitable donations, mortgage interest, and property taxes, but there is a long list of other deductions that fall into the “miscellaneous” category. Taxpayers who miss these deductions lose the opportunity to make significant reductions in their tax bill, according to the Pennsylvania Institute of Certified Public Accountants (PICPA). Here’s an overview.
Calculating Your AGI
To claim some deductions, specific expenses must add up to more than 2 percent of your adjusted gross income (AGI). To determine if those expenses qualify, add up your total income for the year, then subtract the adjustments to your income, also known as “above the line” deductions. Adjustments typically include deductions for educator expenses, moving expenses, student loan interest and tuition payments, alimony payments, IRA contributions, among others. Let’s say that your AGI adds up to $50,000. Two percent of $50,000 is $1,000. So, after you subtract $1,000 from the total amount of certain miscellaneous expenses, you can deduct the rest. You can refer to your prior year federal income tax return to get a quick estimate of your current year AGI.
Using the 2 Percent Limit
Some deductible expenses that are subject to the 2 percent limit include job-related expenses that your employer does not reimburse, such as travel, entertainment, gifts associated with your work, license or legal fees, and educational costs. Qualified costs you incur for a home office fall in this category, as does the depreciation on a computer your employer requires you to use for work. Uniforms, work clothes not suitable for everyday use, and tools you need for your job also fall into this category, as would union dues. When you look for a job in the same field, your related expenses would be subject to the 2 percent limit. Deductions for tax preparation fees and several other expenses are also subject to the 2 percent threshold.
Other Miscellaneous Deductions
There are some expenses, however, that do not require deducting 2 percent of your AGI. If you own income-producing property that is stolen or suffers damage during the year, that loss will not be subject to the 2 percent limit. Examples include stocks, bonds, vacant lots, gold or silver, and artwork. If you have gambling winnings, you have to report them on your tax return; but you can also deduct gambling losses (up to the total of your winnings). As an example, if you win $1,000 and lose $1,200, you can deduct $1,000 of your losses, effectively canceling any taxes you might have owed on your winnings. If you have a physical or mental disability, you can also deduct the full cost of any impairment-related work expenses, such as a reader if you are blind or a sign language interpreter if you are deaf.
Other Commonly Overlooked Deductions
In addition to the miscellaneous deductions that many taxpayers fail to claim, there are other valuable deductions and credits that taxpayers overlook every year. They include deductions for state and local income tax, medical and dental care expenses, the child and dependent care credit, mortgage refinancing costs, and self-employment expenses. Your CPA can determine whether you qualify for these deductions, including the limits that apply in some cases.
Consult Your Local CPA
There’s a lot more to know about miscellaneous deductions and about the kind of tax planning that can ensure you’re paying the right amount of taxes. Before you finalize your tax return, be sure that you’ve claimed all the deductions and credits to which you’re entitled. If you’re not sure that you’ve taken the right ones, turn to your CPA for expert advice. He or she can answer all your financial questions. To find a CPA in Pennsylvania by location or area of expertise, visit www.ineedacpa.org