Wednesday, April 26, 2017
JUST BECAUSE IT IS “DEDUCTIBLE” DOESN’T MEAN YOU CAN DEDUCT IT
This past tax season I got the following email from a client –
“I was just informed that I am able to write off my union dues which were $370 for the year.”
The client was correct. Union dues are deductible on Schedule A as a “Miscellaneous Expense”. But the client did not actually get a tax deduction for union dues on her 2016 tax return.
Just because a legitimate expense you incurred during the year is “deductible” does not mean that you can actually deduct the item and receive a tax benefit.
Let’s look at this particular “deductible” item – my client’s union dues.
First you must itemize – have more “itemizeable” deductions than the Standard Deduction you are allowed based on your filing status.
There are situations where you either must itemize or it is beneficial to itemize, even if your total allowable deductions are not more than the Standard Deduction – but these are truly rare. And there are certain items that can be deducted either directly against a category of income reported on Page 1 of the 1040 – expenses related to self-employment income on Schedule C or EZ, expenses related to rental income on Schedule E, and direct expenses related to the sale of investments on Schedule D – or “above the line” as an “Adjustment to Income”. But in this case union dues are an itemized deduction claimed on Schedule A.
A classic example of the need to itemize to claim a deduction comes from another of my clients many years ago. When sending me her tax “stuff” a client expressed great joy in her note because she donated her used car to charity so she would get a big tax deduction – as the charity to whom she gave the car had advertised. She was truly disappointed when I told her she got no tax benefit for her gift because she could not itemize (she rented an apartment, so had no deductions for property tax and mortgage interest, and had truly minimal other deductions – and the market value of the used car donated did not push her “over the top”).
Second, in the case of most Miscellaneous Expenses – job-related expenses such as union dues, investment expenses, and tax preparation fees - you must first reduce the total by 2% of your Adjusted Gross Income before you get any tax benefit. If your AGI is $100,000 and your total expenses are $1,500 you get no tax deduction – 2% of $100,000 is $2,000, which is more than $1,500. If your allowable expenses total $2,125 your tax deduction, for which you will receive an actual tax benefit, is only $125.
And third, if you are a victim of the dreaded Alternative Minimum Tax you get no, or a limited, tax benefit from Miscellaneous Expenses. Miscellaneous itemized deductions subject to the 2% of AGI limitation are not deductible in calculating AMT.
In the example at hand, the taxpayer could itemize but did not have total allowable Miscellaneous Expenses, including the union dues, in excess of 2% of AGI. So, while “deductible”, she could not actually deduct, and receive any tax benefit, from her union dues.
In many cases the “deductibility” of an item depends on the specific facts and circumstances of the individual taxpayer. As I have said many times before, the answer to the question “Can I deduct X, Y, or Z” is almost always “it depends”.
Even deductions that you assume based on “common knowledge” are fully deductible may be limited due to “facts and circumstances”. Just because you receive a Form 1098 reporting $12,459 in mortgage interest for the year does not mean you can deduct $12,459 on Schedule A. I believe many taxpayers do not deduct the correct amount of allowable mortgage interest. Your actual mortgage interest deduction is limited based on the amount of the loan and how the money borrowed was used. For complete details check out my MORTGAGE INTEREST GUIDE.
So just because someone tells you, or you hear or read somewhere, that an item is “deductible” does not mean you can actually deduct it on your tax return. As usual check with your tax professional before doing anything.