Individuals may claim itemized deductions for certain miscellaneous expenses. Certain of these expenses are not deductible unless, in aggregate, they exceed two percent of the taxpayer’s adjusted gross income.
There are many expenses that may fall under this category of deductions, including the following:
- Appraisal fees for a casualty loss or charitable contribution;
- Casualty and theft losses from property used in performing services as an employee;
- Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust;
- Fees to collect interest and dividends;
- Hobby expenses, but generally not more than hobby income;
- Indirect miscellaneous deductions from pass-through entities;
- Investment fees and expenses;
- Loss on deposits in an insolvent or bankrupt financial institution;
- Safe deposit box rental fees, except for storing jewelry and other personal effects;
- Service charges on dividend reinvestment plans;
- Tax preparation fees;
- Trustee’s fees for an IRA, if separately billed and paid;
- Business bad debt of an employee
- Business liability insurance premium
- Dues to professional organizations;
- Education expenses;
- Home office expenses for part of a taxpayer’s home used regularly and exclusively in taxpayer’s work;
- Subscriptions to professional journals;
- Union dues;
- Deductible investment expenses from pass-through entities; and
- Attorney’s fees for damages awards.
This deduction is suspended through December 31, 2025, beginning after December 31, 2017.
Note that three points have been highlighted in the above list of deductions that have been lost. These are deductions that are commonly seen on tax returns and are often significant.
If a taxpayer has a business that the IRS determines is a hobby, none of the expenses are allowed to offset the income that must still be reported. The determination as to hobby versus business is a facts and circumstances test that often falls in a gray area that could go either way. The stakes in these disagreements with the IRS have now become much higher.
One classic example is the “gentleman farmer.” Usually, this an individual with substantial sources of income that supports the farming/ranching operation. Before the TCJA, that person could deduct expenses up to the revenue generated subject to the two (2) percent of adjusted gross income limitation. For tax years after December 31, 2017 through December 31, 2025, that taxpayer must report the income and will be allowed no expense deduction to offset the income.
Before the effective date of the TCJA, investors were allowed to deduct the investment advisory fees paid to portfolio managers and brokerage companies. These fees often run into the tens of thousands of dollars. After December 31, 2017 and before January 1, 2026, these fees are not deductible.
This is a particularly tough blow to investors after having just absorbed the 3.8% net investment income tax (also known as the Obamacare tax) on investment income which continues in effect.
Attorney’s Fees for Damage Awards
Until passage of the TCJA, attorney’s fees associated with taxable damage awards were generally deductible subject to the two (2) percent of adjusted gross income limitation. The TCJA eliminated the deduction for all expenses required to be deducted on Schedule A under miscellaneous itemized deductions including those for taxable damage awards.
Here is an example of the effect this may have on a claim paid for $1,000,000 that is entirely taxable.
|Taxable amount from settlement||$ 1,000,000||$ 1,000,000|
|Tax – single with only standard deduction||(331,250)|
|Tax – married with only standard deduction||(300,499)|
|Net proceeds to taxpayer||$299,501||$268,750|
Caution: This explanation is general in nature and should not be used for specific planning. Contact a tax professional for your specific planning needs.
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