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The IRS likes to have the littlest item explained in great detail, like the Victor Hugo of the accounting world. But just like Hugo’s best attempts to describe every tiny detail of the Paris sewers in Les Miserables must have passed over a lichen or two, the IRS can’t capture everything in their rules and regulations.
That’s why we’re given a couple catch-all categories on the Itemized Deduction list on Schedule A. The first one is the Line 23 “other expenses,” the second is the line 28 miscellaneous deductions. We’re going to talk about the first one here.
The other expenses the IRS means for you to deduct are not, unfortunately, that extensive. While it might be tempting to try to put in that poop cleaning service to pick up after your Great Dane’s backyard exploits, that’s not covered. What the IRS allows here are expenses related to producing or collecting taxable income.
In other words, if you had an expense related to making taxable money, if it’s not listed somewhere else, it can be listed here.
The instructions give some examples, like certain legal and accounting fees, clerical help, office rent, safe deposit boxes, and investment expenses. The list is in no ways comprehensive.
Where I saw this deduction most often taken was related in investment expenses. If you have an investment account that is separate from any business investment, you’ll be making personal income that will typically appear on your 1040 between lines 8 and 9. These investment accounts always have some sort of cost (unless you’re some crazy magician, in which case, please let me know your secret). Since that cost occurred in relation to making taxable income, you can list it here as one of your “other expenses” deduction.
Again, unfortunately, no personal expenses allowed. And while paying someone to mow your home’s lawn might give you the peace of mind needed to go out and make money, it’s not a direct connection, and, therefore, not deductible.
Like everything else in this section of Itemized Deductions, the other expenses do have a serious limitation to their usefulness:
The deduction is subject to 2% of your AGI.
I already explained this part when I covered Tax Prep Fees and Unreimbursed Employee Business Expenses, but for those not wanted to click through a million pages (despite helping my Adsense revenue), I’ll explain it again. Page 1 of your 1040 calculates something called Adjusted Gross Income, which accountants think they’re clever when they call it “AGI” (we don’t have a lot going for us in that department, so we take what we can). It’s basically your income, with a couple of random deductions that the government decided were better than all the other deductions, giving the other deductions an inferiority complex.
Anyway, in the other deductions list, there’s a group of miscellaneous deductions that are limited by your AGI. Here’s a screenshot of the list the IRS gives, some of which I’ve talked about before.
To calculate, take your AGI and multiply it by 2%. Then take this list of deductions and sum it up. You can only deduct any amounts that go OVER that 2% you calculated.
Example: George’s only income is his investment account, which makes 40k a between taxable interest and dividends. The investment account costs him $900 a year in fees. Assuming George itemizes his deductions, what amount of these investment expenses (other expenses on the Schedule A) can he deduct?
We’ll make this easy and assume his AGI is his income, which is usually the case. So multiply 40,000 x 2% to get the limitation, which comes out to $800. That means he can take any expenses over $800.
Since Tom has $800 in expenses, he can take $900 – $800 = $100 in other expenses deduction.
IMPORTANT NOTE: These other expenses can be combined with your Tax Prep Fees and your Unreimbursed Employee Business Expenses to calculate the total over your Adjusted Gross Income.