“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.
TTFN
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