28. Miscellaneous Deductions
Table of Contents
* Reminder
* Introduction
* Useful Items - You may want to see:
* Deductions Subject to the 2% Limit
o Armed Forces reservists.
o Educators.
o Impairment-related work expenses.
o Performing artists.
o State and local government officials paid on a fee basis.
o Unreimbursed Employee Expenses (Line 20)
o Tax Preparation Fees (Line 21)
o Other Expenses (Line 22)
* Deductions Not Subject to the 2% Limit
o List of Deductions
o Officials Paid on a Fee Basis
o Armed Forces Reservists Traveling More Than 100 Miles From Home
* Nondeductible Expenses
o List of Nondeductible Expenses
Reminder
Limit on itemized deductions. For 2005, if your adjusted gross income is
more than $145,950 ($72,975 if you are married filing separately), you may
have to reduce the amount of certain itemized deductions, including most
miscellaneous deductions. See chapter 29 for more information.
Introduction
This chapter explains which expenses you can claim as miscellaneous
itemized deductions on Schedule A (Form 1040). You must reduce the total of
most miscellaneous itemized deductions by 2% of your adjusted gross income.
This chapter covers the following topics.
*
Deductions subject to the 2% limit.
*
Deductions not subject to the 2% limit.
*
Expenses you cannot deduct.
Records you should keep
You must keep records to verify your deductions. You should keep receipts,
canceled checks, financial account statements, and other documentary
evidence. For more information on recordkeeping, get Publication 552,
Recordkeeping for Individuals.
Useful Items - You may want to see:
Publication
*
529 Miscellaneous Deductions
*
535 Business Expenses
*
587 Business Use of Your Home (Including Use by Daycare Providers)
*
946 How To Depreciate Property
Form (and Instructions)
*
2106
Employee Business Expenses
*
2106-EZ
Unreimbursed Employee Business Expenses
Deductions Subject to the 2% Limit
You can deduct certain expenses as miscellaneous itemized deductions on
Schedule A
(Form 1040). You can claim the amount of expenses that is more than 2% of
your adjusted gross income. You figure your deduction on Schedule A by
subtracting 2% of your adjusted gross income from the total amount of these
expenses. Your adjusted gross income is the amount on Form 1040, line 38.
Generally, you apply the 2% limit after you apply any other deduction
limit. For example, you apply the 50% (or 70%) limit on business-related
meals and entertainment (discussed in chapter 26) before you apply the 2%
limit.
Deductions subject to the 2% limit are discussed in the three categories in
which you report them on Schedule A.
1.
Unreimbursed employee expenses (line 20).
2.
Tax preparation fees (line 21).
3.
Other expenses (line 22).
Exceptions to 2% limit. The following paragraphs describe certain
employee business expenses that are not subject to the 2% limit.
Armed Forces reservists. If you are a member of a reserve component of
the Armed Forces of the United States, and you travel more than 100 miles
away from home in connection with your performance of services as a member
of the reserves, you may be able to deduct some of your reserve-related
travel costs as an adjustment to gross income rather than as an itemized
deduction. For more information, see Armed Forces Reservists Traveling More
Than 100 Miles From Home, under Deductions Not Subject to the 2% Limit, later.
Educators. If you were an eligible educator in 2005, you can deduct up to
$250 of qualified expenses you paid in 2005 as an adjustment to income
rather than as an itemized deduction. See Educator Expenses in chapter 19.
Impairment-related work expenses. If you have a physical or mental
disability, certain expenses you incur that allow you to work may not be
subject to the 2% limit. See Impairment-Related Work Expenses under
Deductions Not Subject to the 2% Limit, later.
Performing artists. If you are a qualified performing artist, you may be
able to deduct your employee business expenses as an adjustment to income
rather than as a miscellaneous itemized deduction. See Special Rules in
chapter 26 if you need more information about this exception.
State and local government officials paid on a fee basis. If you
performed services as an employee of a state or local government and you
were paid in whole or in part on a fee basis, you can claim your trade or
business expenses in performing those services as an adjustment to income,
rather than as a miscellaneous deduction. See Officials Paid on a Fee Basis
under Deductions Not Subject to the 2% Limit, later.
Unreimbursed Employee Expenses (Line 20)
You can deduct only unreimbursed employee expenses that are:
1.
Paid or incurred during your tax year,
2.
For carrying on your trade or business of being an employee, and
3.
Ordinary and necessary.
An expense is ordinary if it is common and accepted in your trade,
business, or profession. An expense is necessary if it is appropriate and
helpful to your business. An expense does not have to be required to be
considered necessary.
Examples of unreimbursed employee expenses are listed next. The list is
followed by discussions of additional unreimbursed employee expenses.
*
Business bad debt of an employee.
*
Education that is work related. (See chapter 27.)
*
Legal fees related to your job.
*
Licenses and regulatory fees.
*
Malpractice insurance premiums.
*
Medical examinations required by an employer.
*
Occupational taxes.
*
Passport for a business trip.
*
Subscriptions to professional journals and trade magazines related to
your work.
*
Travel, transportation, entertainment, and gifts related to your
work. (See chapter 26.)
Business Liability Insurance
You can deduct insurance premiums you paid for protection against personal
liability for wrongful acts on the job.
Damages for Breach of Employment Contract
If you break an employment contract, you can deduct damages you pay your
former employer that are attributable to the pay you received from that
employer.
Depreciation on Computers or Cellular Telephones
You can claim a depreciation deduction for a computer or cellular telephone
that you use in your work as an employee if its use is:
1.
For the convenience of your employer, and
2.
Required as a condition of your employment.
For more information about the rules and exceptions to the rules affecting
the allowable deductions for a home computer or cellular telephone, see
Publication 529.
Dues to Chambers of Commerce and Professional Societies
You may be able to deduct dues paid to professional organizations (such as
bar associations and medical associations) and to chambers of commerce and
similar organizations, if membership helps you carry out the duties of your
job. Similar organizations include:
*
Boards of trade,
*
Business leagues,
*
Civic or public service organizations,
*
Real estate boards, and
*
Trade associations.
You cannot deduct dues paid to an organization if one of its main purposes
is to:
1.
Conduct entertainment activities for members or their guests, or
2.
Provide members or their guests with access to entertainment facilities.
Dues paid to airline, hotel, and luncheon clubs are not deductible. See
Club Dues under Nondeductible Expenses, later.
Lobbying and political activities. You may not be able to deduct that
part of your dues that is for certain lobbying and political activities.
See Dues used for lobbying under Lobbying Expenses, later.
Educator Expenses Over Limit
If you were an educator in 2005 and you had qualified expenses that were
more than you can deduct on Form 1040, line 23, you can deduct the rest as
an itemized deduction subject to the 2% limit. See Educator Expenses in
chapter 19.
Home Office
If you use a part of your home regularly and exclusively for business
purposes, you may be able to deduct a part of the operating expenses and
depreciation of your home.
You can claim this deduction for the business use of a part of your home
only if you use that part of your home regularly and exclusively:
1.
As your principal place of business for any trade or business,
2.
As a place to meet or deal with your patients, clients, or customers
in the normal course of your trade or business, or
3.
In the case of a separate structure not attached to your home, in
connection with your trade or business.
The regular and exclusive business use must be for the convenience of your
employer and not just appropriate and helpful in your job. Get Publication
587 for more detailed information and a worksheet.
Job Search Expenses
You can deduct certain expenses you have in looking for a new job in your
present occupation, even if you do not get a new job.
You cannot deduct these expenses if:
1.
You are looking for a job in a new occupation,
2.
There was a substantial break between the ending of your last job and
your looking for a new one, or
3.
You are looking for a job for the first time.
Employment and outplacement agency fees. You can deduct employment and
outplacement agency fees you pay in looking for a new job in your present
occupation.
Employer pays you back. If, in a later year, your employer pays you back
for employment agency fees, you must include the amount you receive in your
gross income up to the amount of your tax benefit in the earlier year. (See
Recoveries in chapter 12.)
Employer pays the employment agency. If your employer pays the fees
directly to the employment agency and you are not responsible for them, you
do not include them in your gross income.
Résumé. You can deduct amounts you spend for preparing and mailing copies
of a résumé to prospective employers if you are looking for a new job in
your present occupation.
Travel and transportation expenses. If you travel to an area and, while
there, you look for a new job in your present occupation, you may be able
to deduct travel expenses to and from the area. You can deduct the travel
expenses if the trip is primarily to look for a new job. The amount of time
you spend on personal activity compared to the amount of time you spend in
looking for work is important in determining whether the trip is primarily
personal or is primarily to look for a new job.
Even if you cannot deduct the travel expenses to and from an area, you
can deduct the expenses of looking for a new job in your present occupation
while in the area.
You can choose to use the standard mileage rate to figure your car
expenses. The rate for business use of a vehicle before September 1, 2005,
is 40½ cents per mile. The rate for business use of a vehicle after August
31, 2005, is 48½ cents per mile. See chapter 26 for more information.
Licenses and Regulatory Fees
You can deduct the amount you pay each year to state or local governments
for licenses and regulatory fees for your trade, business, or profession.
Occupational Taxes
You can deduct an occupational tax charged at a flat rate by a locality for
the privilege of working or conducting a business in the locality. If you
are an employee, you can claim occupational taxes only as a miscellaneous
deduction subject to the 2% limit; you cannot claim them as a deduction for
taxes elsewhere on your return.
Repayment of Income Aid Payment
An “income aid payment” is one that is received under an employer's plan to
aid employees who lose their jobs because of lack of work. If you repay a
lump-sum income aid payment that you received and included in income in an
earlier year, you can deduct the repayment.
Research Expenses of a College Professor
If you are a college professor, you can deduct research expenses, including
travel expenses, for teaching, lecturing, or writing and publishing on
subjects that relate directly to the field of your teaching duties. You
must have undertaken the research as a means of carrying out the duties
expected of a professor and without expectation of profit apart from
salary. However, you cannot deduct the cost of travel as a form of education.
Tools Used in Your Work
Generally, you can deduct amounts you spend for tools used in your work if
the tools wear out and are thrown away within 1 year from the date of
purchase. You can depreciate the cost of tools that have a useful life
substantially beyond the tax year. For more information about depreciation,
see Publication 946.
Union Dues and Expenses
You can deduct dues and initiation fees you pay for union membership.
You can also deduct assessments for benefit payments to unemployed union
members. However, you cannot deduct the part of the assessments or
contributions that provides funds for the payment of sick, accident, or
death benefits. Also, you cannot deduct contributions to a pension fund,
even if the union requires you to make the contributions.
You may not be able to deduct amounts you pay to the union that are related
to certain lobbying and political activities. See Lobbying Expenses under
Nondeductible Expenses, later.
Work Clothes and Uniforms
You can deduct the cost and upkeep of work clothes if the following two
requirements are met.
1.
You must wear them as a condition of your employment.
2.
The clothes are not suitable for everyday wear.
Caution
It is not enough that you wear distinctive clothing. The clothing must be
specifically required by your employer. Nor is it enough that you do not,
in fact, wear your work clothes away from work. The clothing must not be
suitable for taking the place of your regular clothing.
Examples of workers who may be able to deduct the cost and upkeep of work
clothes are: delivery workers, firefighters, health care workers, law
enforcement officers, letter carriers, professional athletes, and
transportation workers (air, rail, bus, etc.).
Musicians and entertainers can deduct the cost of theatrical clothing and
accessories if they are not suitable for everyday wear.
However, work clothing consisting of white cap, white shirt or white
jacket, white bib overalls, and standard work shoes, which a painter is
required by his union to wear on the job, is not distinctive in character
or in the nature of a uniform. Similarly, the costs of buying and
maintaining blue work clothes worn by a welder at the request of a foreman
are not deductible.
Protective clothing. You can deduct the cost of protective clothing
required in your work, such as safety shoes or boots, safety glasses, hard
hats, and work gloves.
Examples of workers who may be required to wear safety items are:
carpenters, cement workers, chemical workers, electricians, fishing boat
crew members, machinists, oil field workers, pipe fitters, steamfitters,
and truck drivers.
Military uniforms. You generally cannot deduct the cost of your uniforms
if you are on full-time active duty in the armed forces. However, if you
are an armed forces reservist, you can deduct the unreimbursed cost of your
uniform if military regulations restrict you from wearing it except while
on duty as a reservist. In figuring the deduction, you must reduce the cost
by any nontaxable allowance you receive for these expenses.
If local military rules do not allow you to wear fatigue uniforms when
you are off duty, you can deduct the amount by which the cost of buying and
keeping up these uniforms is more than the uniform allowance you receive.
You can deduct the cost of your uniforms if you are a civilian faculty or
staff member of a military school.
Tax Preparation Fees (Line 21)
You can usually deduct tax preparation fees in the year you pay them. Thus,
on your 2005 return, you can deduct fees paid in 2005 for preparing your
2004 return. These fees include the cost of tax preparation software
programs and tax publications. They also include any fee you paid for
electronic filing of your return. However, if you paid your tax by credit
card, you cannot deduct the convenience fee you were charged.
Deduct expenses of preparing tax schedules relating to profit or loss from
business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm
income and expenses (Schedule F) on the appropriate schedule. Deduct the
expenses of preparing the remainder of the return on Schedule A (Form
1040), line 21.
Other Expenses (Line 22)
You can deduct certain other expenses as miscellaneous itemized deductions
subject to the 2%-of-adjusted-gross-income limit. These are expenses you pay:
1.
To produce or collect income that must be included in your gross income,
2.
To manage, conserve, or maintain property held for producing such
income, or
3.
To determine, contest, pay, or claim a refund of any tax.
You can deduct expenses you pay for the purposes in (1) and (2) above only
if they are reasonably and closely related to these purposes. Some of these
other expenses are explained in the following discussions.
If the expenses you pay produce income that is only partially taxable, see
Tax-Exempt Income Expenses, later, under Nondeductible Expenses.
Appraisal Fees
You can deduct appraisal fees if you pay them to figure a casualty loss or
the fair market value of donated property.
Certain Casualty and Theft Losses
You can deduct a casualty or theft loss as a miscellaneous itemized
deduction subject to the 2% limit if you used the damaged or stolen
property in performing services as an employee. First report the loss in
Section B of Form 4684, Casualties and Thefts. You may also have to include
the loss on Form 4797, Sales of Business Property, if you are otherwise
required to file that form. To figure your deduction, add all casualty or
theft losses from this type of property included on Form 4684, lines 35 and
41b, or Form 4797, line 18a. For other casualty and theft losses, see
chapter 25.
Clerical Help and Office Rent
You can deduct office expenses, such as rent and clerical help, that you
have in connection with your investments and collecting the taxable income
on them.
Depreciation on Home Computer
You can deduct depreciation on your home computer if you use it to produce
income (for example, to manage your investments that produce taxable
income). You generally must depreciate the computer using the straight line
method over the Alternative Depreciation System (ADS) recovery period. But
if you work as an employee and also use the computer in that work, see
Publication 946.
Excess Deductions of an Estate
If an estate's total deductions in its last tax year are more than its
gross income for that year, the beneficiaries succeeding to the estate's
property can deduct the excess. Do not include deductions for the estate's
personal exemption and charitable contributions when figuring the estate's
total deductions. The beneficiaries can claim the deduction only for the
tax year in which, or with which, the estate terminates, whether the year
of termination is a normal year or a short tax year. For more information,
see Termination of Estate in Publication 559, Survivors, Executors, and
Administrators.
Fees to Collect Interest and Dividends
You can deduct fees you pay to a broker, bank, trustee, or similar agent to
collect your taxable bond interest or dividends on shares of stock. But you
cannot deduct a fee you pay to a broker to buy investment property, such as
stocks or bonds. You must add the fee to the cost of the property.
You cannot deduct the fee you pay to a broker to sell securities. You can
use the fee only to figure gain or loss from the sale. See the instructions
for Schedule D (Form 1040), columns (d) and (e), for information on how to
report the fee.
Hobby Expenses
You can generally deduct hobby expenses, but only up to the amount of hobby
income. A hobby is not a business because it is not carried on to make a
profit. See Activity not for profit in chapter 12 under Other Income.
Indirect Deductions of Pass-Through Entities
Pass-through entities include partnerships, S corporations, and mutual
funds that are not publicly offered. Deductions of pass-through entities
are passed through to the partners or shareholders. The partners or
shareholders can deduct their share of passed-through deductions for
investment expenses as miscellaneous itemized deductions subject to the 2%
limit.
Example.
You are a member of an investment club that is formed solely to invest in
securities. The club is treated as a partnership. The partnership's income
is solely from taxable dividends, interest, and gains from sales of
securities. In this case, you can deduct your share of the partnership's
operating expenses as miscellaneous itemized deductions subject to the 2%
limit. However, if the investment club partnership has investments that
also produce nontaxable income, you cannot deduct your share of the
partnership's expenses that produce the nontaxable income.
Publicly offered mutual funds. Publicly offered mutual funds do not pass
deductions for investment expenses through to shareholders. A mutual fund
is “publicly offered” if it is:
1.
Continuously offered pursuant to a public offering,
2.
Regularly traded on an established securities market, or
3.
Held by or for at least 500 persons at all times during the tax year.
A publicly offered mutual fund will send you a Form 1099-DIV, Dividends
and Distributions, or a substitute form, showing the net amount of dividend
income (gross dividends minus investment expenses). This net figure is the
amount you report on your return as income. You cannot deduct investment
expenses.
Information returns. You should receive information returns from
pass-through entities.
Partnerships and S corporations. These entities issue Schedule K-1, which
lists the items and amounts you must report and identifies the tax return
schedules and lines to use.
Nonpublicly offered mutual funds. These funds will send you a Form
1099-DIV, or a substitute form, showing your share of gross income and
investment expenses. You can claim the expenses only as a miscellaneous
itemized deduction subject to the 2% limit.
Investment Fees and Expenses
You can deduct investment fees, custodial fees, trust administration fees,
and other expenses you paid for managing your investments that produce
taxable income.
Legal Expenses
You can usually deduct legal expenses that you incur in attempting to
produce or collect taxable income or that you pay in connection with the
determination, collection, or refund of any tax.
You can also deduct legal expenses that are:
1.
Related to either doing or keeping your job, such as those you paid
to defend yourself against criminal charges arising out of your trade or
business,
2.
For tax advice related to a divorce, if the bill specifies how much
is for tax advice and it is determined in a reasonable way, or
3.
To collect taxable alimony.
You can deduct expenses of resolving tax issues relating to profit or loss
from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or
farm income and expenses (Schedule F) on the appropriate schedule. You
deduct expenses of resolving nonbusiness tax issues on Schedule A (Form
1040). See Tax Preparation Fees, earlier.
Unlawful discrimination claims. You may be able to deduct, as an
adjustment to income on Form 1040, line 36, rather than as a miscellaneous
itemized deduction, attorney fees and court costs for actions settled or
decided after October 22, 2004, involving a claim of unlawful
discrimination, a claim against the U.S. Government, or a claim made under
section 1862(b)(3)(A) of the Social Security Act. However, the amount you
can deduct on Form 1040, line 36, is limited to the amount you included in
gross income in 2005 for that claim. The rest of your attorney fees and
court costs for this type of claim are deductible as a miscellaneous
itemized deduction subject to the 2% limit. See Publication 525 for more
information.
Loss on Deposits
For information on whether, and if so, how, you may deduct a loss on your
deposit in a qualified financial institution, see Deposit in Insolvent or
Bankrupt Financial Institution in chapter 14.
Repayments of Income
If you had to repay an amount that you included in income in an earlier
year, you may be able to deduct the amount you repaid. If the amount you
had to repay was ordinary income of $3,000 or less, the deduction is
subject to the 2% limit. If it was more than $3,000, see Repayments Under
Claim of Right under Deductions Not Subject to the 2% Limit, later.
Repayments of Social Security Benefits
For information on how to deduct your repayments of certain social security
benefits, see Repayments More Than Gross Benefits in chapter 11.
Safe Deposit Box Rent
You can deduct safe deposit box rent if you use the box to store taxable
income-producing stocks, bonds, or investment-related papers and documents.
You cannot deduct the rent if you use the box only for jewelry, other
personal items, or tax-exempt securities.
Service Charges on Dividend Reinvestment Plans
You can deduct service charges you pay as a subscriber in a dividend
reinvestment plan. These service charges include payments for:
1.
Holding shares acquired through a plan,
2.
Collecting and reinvesting cash dividends, and
3.
Keeping individual records and providing detailed statements of accounts.
Trustee's Administrative Fees for IRA
Trustee's administrative fees that are billed separately and paid by you in
connection with your individual retirement arrangement (IRA) are deductible
(if they are ordinary and necessary) as a miscellaneous itemized deduction
subject to the 2% limit. For more information about IRAs, see chapter 17.
Deductions Not Subject to the 2% Limit
You can deduct the items listed below as miscellaneous itemized deductions.
They are not subject to the 2% limit. Report these items on Schedule A
(Form 1040), line 27.
List of Deductions
Each of the following items is discussed in detail after the list.
*
Amortizable premium on taxable bonds.
*
Casualty and theft losses from income-producing property.
*
Federal estate tax on income in respect of a decedent.
*
Gambling losses up to the amount of gambling winnings.
*
Impairment-related work expenses of persons with disabilities.
*
Loss from other activities from Schedule K-1 (Form 1065-B), box 2.
*
Repayments of more than $3,000 under a claim of right.
*
Unrecovered investment in an annuity.
Amortizable Premium on Taxable Bonds
In general, if the amount you pay for a bond is greater than its stated
principal amount, the excess is bond premium. You can elect to amortize the
premium on taxable bonds. The amortization of the premium is generally an
offset to interest income on the bond rather than a separate deduction item.
Part of the premium on some bonds may be a miscellaneous deduction not
subject to the 2% limit. For more information, see Amortizable Premium on
Taxable Bonds in Publication 529, and Bond Premium Amortization in chapter
3 of Publication 550, Investment Income and Expenses.
Certain Casualty and Theft Losses
You can deduct a casualty or theft loss as a miscellaneous itemized
deduction not subject to the 2% limit if the damaged or stolen property was
income-producing property (property held for investment, such as stocks,
notes, bonds, gold, silver, vacant lots, and works of art). First, report
the loss in Form 4684, Section B. You may also have to include the loss on
Form 4797 if you are otherwise required to file that form. To figure your
deduction, add all casualty or theft losses from this type of property
included on Form 4684, lines 35 and 41b, or Form 4797, line 18a. For more
information on casualty and theft losses, see chapter 25.
Federal Estate Tax on Income in Respect of a Decedent
You can deduct the federal estate tax attributable to income in respect of
a decedent that you as a beneficiary include in your gross income. Income
in respect of the decedent is gross income that the decedent would have
received had death not occurred and that was not properly includible in the
decedent's final income tax return. See Publication 559 for more information.
Gambling Losses Up to the Amount of Gambling Winnings
You must report the full amount of your gambling winnings for the year on
Form 1040, line 21. You deduct your gambling losses for the year on
Schedule A (Form 1040), line 27. You cannot deduct gambling losses that are
more than your winnings.
Caution
You cannot reduce your gambling winnings by your gambling losses and report
the difference. You must report the full amount of your winnings as income
and claim your losses (up to the amount of winnings) as an itemized
deduction. Therefore, your records should show your winnings separately
from your losses.
Records you should keep
Diary of winnings and losses. You must keep an accurate diary or similar
record of your losses and winnings.
Your diary should contain at least the following information.
1.
The date and type of your specific wager or wagering activity.
2.
The name and address or location of the gambling establishment.
3.
The names of other persons present with you at the gambling
establishment.
4.
The amount(s) you won or lost.
See Publication 529 for more information.
Impairment-Related Work Expenses
If you have a physical or mental disability that limits your being
employed, or substantially limits one or more of your major life
activities, such as performing manual tasks, walking, speaking, breathing,
learning, and working, you can deduct your impairment-related work expenses.
Impairment-related work expenses are ordinary and necessary business
expenses for attendant care services at your place of work and for other
expenses in connection with your place of work that are necessary for you
to be able to work.
Where to report. If you are an employee, you enter impairment-related
work expenses on Form 2106 or Form 2106-EZ. Enter on Schedule A (Form
1040), line 27, that part of the amount on Form 2106, line 10, or Form
2106-EZ, line 6, that is related to your impairment. Enter the amount that
is unrelated to your impairment on Schedule A (Form 1040), line 20.
Repayments Under Claim of Right
If you had to repay more than $3,000 that you included in your income in an
earlier year because at the time you thought you had an unrestricted right
to it, you may be able to deduct the amount you repaid or take a credit
against your tax. See Repayments in chapter 12 for more information.
Unrecovered Investment in Annuity
A retiree who contributed to the cost of an annuity can exclude from income
a part of each payment received as a tax-free return of the retiree's
investment. If the retiree dies before the entire investment is recovered
tax free, any unrecovered investment can be deducted on the retiree's final
income tax return. See chapter 10 for more information about the tax
treatment of pensions and annuities.
Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2
If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss,
report it on Schedule A (Form 1040), line 27. It is not subject to the
passive activity limitations. See the 2005 Partner's Instructions For
Schedule K-1 (Form 1065-B) for more information.
Officials Paid on a Fee Basis
If you are a fee-basis official, you can claim your expenses in performing
services in that job as an adjustment to income rather than as a
miscellaneous itemized deduction. To qualify as a fee-basis official, you
must be employed by a state or local government and be paid in whole or in
part on a fee basis.
Where to report. If you qualify as a fee-basis official, you should first
complete Form 2106 or Form 2106-EZ. Then include your expenses in
performing services in that job (Form 2106, line 10, or Form 2106-EZ, line
6) on Form 1040,
line 24.
Armed Forces Reservists Traveling More Than 100 Miles From Home
If you are a member of a reserve component of the Armed Forces of the
United States and you travel more than 100 miles away from home in
connection with your performance of services as a member of the reserves,
you can deduct your travel expenses as an adjustment to gross income rather
than as a miscellaneous itemized deduction. The amount of expenses you can
deduct as an adjustment to gross income is limited to the regular federal
per diem rate (for lodging, meals, and incidental expenses) and the
standard mileage rate (for car expenses) plus any parking fees, ferry fees,
and tolls. For more information, see Publication 463.
Member of a reserve component. You are a member of a reserve component of
the Armed Forces of the United States if you are in the Army, Naval, Marine
Corps, Air Force, or Coast Guard Reserve, the Army National Guard of the
United States, the Air National Guard of the United States, or the Reserve
Corps of the Public Health Service.
Where to report. If you have reserve-related travel that takes you more
than 100 miles from home, you should first complete Form 2106 or Form
2106-EZ. Then include your expenses for reserve travel over 100 miles from
home, up to the federal rate, from Form 2106, line 10, or Form 2106-EZ,
line 6, in the total on Form 1040, line 24. Subtract this amount from the
total on Form 2106, line 10, or Form 2106-EZ, line 6, and deduct the
balance as an itemized deduction on Schedule A (Form 1040), line 20.
You cannot deduct travel expenses that do not take you more than 100
miles from home as an adjustment to gross income. Instead, you must
complete Form 2106 or 2106-EZ and deduct those expenses as an itemized
deduction on Schedule A (Form 1040), line 20.
Nondeductible Expenses
Examples of nondeductible expenses are listed next. The list is followed by
discussions of additional nondeductible expenses.
List of Nondeductible Expenses
*
Broker's commissions that you paid in connection with your IRA or
other investment property.
*
Burial or funeral expenses, including the cost of a cemetery lot.
*
Capital expenses.
*
Fees and licenses, such as car licenses, marriage licenses, and dog tags.
*
Hobby losses — But see Hobby Expenses, earlier.
*
Home repairs, insurance, and rent.
*
Illegal bribes and kickbacks—See Bribes and kickbacks in chapter 13
of Publication 535.
*
Losses from the sale of your home, furniture, personal car, etc.
*
Personal disability insurance premiums.
*
Personal, living, or family expenses.
*
The value of wages never received or lost vacation time.
Adoption Expenses
You cannot deduct the expenses of adopting a child, but you may be able to
take a credit for those expenses. See chapter 37.
Campaign Expenses
You cannot deduct campaign expenses of a candidate for any office, even if
the candidate is running for reelection to the office. These include
qualification and registration fees for primary elections.
Legal fees. You cannot deduct legal fees paid to defend charges that
arise from participation in a political campaign.
Check-Writing Fees on Personal Account
If you have a personal checking account, you cannot deduct fees charged by
the bank for the privilege of writing checks, even if the account pays
interest.
Club Dues
Generally, you cannot deduct the cost of membership in any club organized
for business, pleasure, recreation, or other social purpose. This includes
business, social, athletic, luncheon, sporting, airline, hotel, golf, and
country clubs. For exceptions, see Dues to Chambers of Commerce and
Professional Societies under Unreimbursed Employee Expenses, earlier.
Commuting Expenses
You cannot deduct commuting expenses (the cost of transportation between
your home and your main or regular place of work). If you haul tools,
instruments, or other items, in your car to and from work, you can deduct
only the additional cost of hauling the items such as the rent on a trailer
to carry the items.
Fines or Penalties
You cannot deduct fines or penalties you pay to a governmental unit for
violating a law. This includes an amount paid in settlement of your actual
or potential liability for a fine or penalty (civil or criminal). Fines or
penalties include parking tickets, tax penalties, and penalties deducted
from teachers' paychecks after an illegal strike.
Health Spa Expenses
You cannot deduct health spa expenses, even if there is a job requirement
to stay in excellent physical condition, such as might be required of a law
enforcement officer.
Home Security System
You cannot deduct the cost of a home security system as a miscellaneous
deduction. However, you may be able to claim a deduction for a home
security system as a business expense if you have a home office. See Home
Office under Unreimbursed Employee Expenses, earlier, and Security System
under Deducting Expenses in Publication 587.
Homeowners' Insurance Premiums
You cannot deduct premiums that you pay or that are placed in escrow for
insurance on your home, such as fire and liability or mortgage insurance.
Investment-Related Seminars
You cannot deduct any expenses for attending a convention, seminar, or
similar meeting for investment purposes.
Life Insurance Premiums
You cannot deduct premiums you pay on your life insurance. You may be able
to deduct, as alimony, premiums you pay on life insurance policies assigned
to your former spouse. See chapter 18 for information on alimony.
Lobbying Expenses
You generally cannot deduct amounts paid or incurred for lobbying expenses.
These include expenses to:
1.
Influence legislation,
2.
Participate or intervene in any political campaign for, or against,
any candidate for public office,
3.
Attempt to influence the general public, or segments of the public,
about elections, legislative matters, or referendums, or
4.
Communicate directly with covered executive branch officials in any
attempt to influence the official actions or positions of those officials.
Lobbying expenses also include any amounts paid or incurred for research,
preparation, planning, or coordination of any of these activities.
Dues used for lobbying. If a tax-exempt organization notifies you that
part of the dues or other amounts you pay to the organization are used to
pay nondeductible lobbying expenses, you cannot deduct that part. See
Lobbying Expenses in Publication 529 for information on exceptions.
Lost or Mislaid Cash or Property
You cannot deduct a loss based on the mere disappearance of money or
property. However, an accidental loss or disappearance of property can
qualify as a casualty if it results from an identifiable event that is
sudden, unexpected, or unusual. See chapter 25.
Example.
A car door is accidentally slammed on your hand, breaking the setting of
your diamond ring. The diamond falls from the ring and is never found. The
loss of the diamond is a casualty.
Lunches with Coworkers
You cannot deduct the expenses of lunches with co-workers, except while
traveling away from home on business. See chapter 26 for information on
deductible expenses while traveling away from home.
Meals While Working Late
You cannot deduct the cost of meals while working late. However, you may be
able to claim a deduction if the cost of meals is a deductible
entertainment expense, or if you are traveling away from home. See chapter
26 for information on deductible entertainment expenses and expenses while
traveling away from home.
Personal Legal Expenses
You cannot deduct personal legal expenses such as those for the following.
1.
Custody of children.
2.
Breach of promise to marry suit.
3.
Civil or criminal charges resulting from a personal relationship.
4.
Damages for personal injury.
5.
Preparation of a title (or defense or perfection of a title).
6.
Preparation of a will.
7.
Property claims or property settlement in a divorce.
You cannot deduct these expenses even if a result of the legal proceeding
is the loss of income-producing property.
Political Contributions
You cannot deduct contributions made to a political candidate, a campaign
committee, or a newsletter fund. Advertisements in convention bulletins and
admissions to dinners or programs that benefit a political party or
political candidate are not deductible.
Professional Accreditation Fees
You cannot deduct professional accreditation fees such as the following.
1.
Accounting certificate fees paid for the initial right to practice
accounting.
2.
Bar exam fees and incidental expenses in securing admission to the bar.
3.
Medical and dental license fees paid to get initial licensing.
Professional Reputation
You cannot deduct expenses of radio and TV appearances to increase your
personal prestige or establish your professional reputation.
Relief Fund Contributions
You cannot deduct contributions paid to a private plan that pays benefits
to any covered employee who cannot work because of any injury or illness
not related to the job.
Residential Telephone Service
You cannot deduct any charge (including taxes) for basic local telephone
service for the first telephone line to your residence, even if it is used
in a trade or business.
Stockholders' Meetings
You cannot deduct transportation and other expenses you pay to attend
stockholders' meetings of companies in which you own stock but have no
other interest. You cannot deduct these expenses even if you are attending
the meeting to get information that would be useful in making further
investments.
Tax-Exempt Income Expenses
You cannot deduct expenses to produce tax-exempt income. You cannot deduct
interest on a debt incurred or continued to buy or carry
tax-exempt securities.
If you have expenses to produce both taxable and tax-exempt income, but you
cannot identify the expenses that produce each type of income, you must
divide the expenses based on the amount of each type of income to determine
the amount that you can deduct.
Example.
During the year, you received taxable interest of $4,800 and tax-exempt
interest of $1,200. In earning this income, you had total expenses of $500
during the year. You cannot identify the amount of each expense item that
is for each income item. Therefore, 80% ($4,800/$6,000) of the expense is
for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt
interest. You can deduct, subject to the 2% limit, expenses of $400 (80% of
$500).
Travel Expenses for Another Individual
You generally cannot deduct travel expenses you pay or incur for a spouse,
dependent, or other individual who accompanies you (or your employee) on
business travel. See chapter 26 for more information on deductible travel
expenses.
Voluntary Unemployment Benefit Fund Contributions
You cannot deduct voluntary unemployment benefit fund contributions you
make to a union fund or a private fund. However, you can deduct
contributions as taxes if state law requires you to make them to a state
unemployment fund that covers you for the loss of wages from unemployment
caused by business conditions.
Wristwatches
You cannot deduct the cost of a wristwatch, even if there is a job
requirement that you know the correct time to properly perform your duties.
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