Publication 529 |
2001 Tax Year |
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 34.
Generally, you apply the 2% limit after you apply any other
deduction limit. For example, you apply the 50% (or 60%) limit on
business-related meals and entertainment (discussed later under
Travel, Transportation, Meal, Entertainment, and Gift
Expenses) 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: unreimbursed
employee expenses (line 20), tax preparation fees
(line 21), and other expenses (line 22).
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 Performing Artists
under Deductions Not Subject to the 2% Limit, later.
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 gross 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
You can deduct only unreimbursed employee expenses that are:
- Paid or incurred during your tax year,
- For carrying on your trade or business of being an employee,
and
- Ordinary and necessary.
An expense is ordinary if it is common and accepted
in your type of trade or business. An expense is necessary
if it is appropriate and helpful to your trade or business.
You may be able to deduct the following items as unreimbursed
employee expenses.
- Business bad debt of an employee.
- Business liability insurance premiums.
- Damages paid to a former employer for breach of an
employment contract.
- Depreciation on a computer or cellular telephone your
employer requires you to use in your work.
- Dues to a chamber of commerce if membership helps you do
your job.
- Dues to professional societies.
- Education that is work related.
- Home office or part of your home used regularly and
exclusively in your work.
- Job search expenses in your present occupation.
- Laboratory breakage fees.
- 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.
- Repayment of an income aid payment received under an
employer's plan.
- Research expenses of a college professor.
- Subscriptions to professional journals and trade magazines
related to your work.
- Tools and supplies used in your work.
- Travel, transportation, entertainment, and gift expenses
related to your work.
- Union dues and expenses.
- Work clothes and uniforms if required and not suitable for
everyday use.
Business Bad Debt
A business bad debt is a loss from a debt created or acquired in
your trade or business. Any other worthless debt is a business bad
debt only if there is a very close relationship between the debt and
your trade or business when the debt becomes worthless.
A debt has a very close relationship to your trade or business of
being an employee if your main motive for incurring the debt is a
business reason.
Example.
You make a bona fide loan to the corporation you work for. It fails
to pay you back. You had to make the loan in order to keep your job.
You have a business bad debt as an employee.
More information.
For more information on business bad debts, see chapter 11 in
Publication 535.
For information on nonbusiness bad debts, see chapter
4 in Publication 550,
Investment Income and Expenses.
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 if the damages 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:
- For the convenience of your employer, and
- Required as a condition of your employment.
For the convenience of your employer.
This means that your use of the computer or cellular telephone is
for a substantial business reason of your employer. You must consider
all facts in making this determination. Use of your computer or
cellular phone during your regular working hours to carry on your
employer's business is generally for the convenience of your employer.
Required as a condition of your employment.
This means that you cannot properly perform your duties without the
computer or cellular telephone. Whether you can properly perform your
duties without it depends on all the facts and circumstances. It is
not necessary that your employer explicitly requires you to use your
computer or cellular telephone. But neither is it enough that your
employer merely states that your use of the item is a condition of
your employment.
Example.
You are an engineer with an engineering firm. You occasionally take
work home at night rather than work late at the office. You own and
use a computer that is similar to the one you use at the office to
complete your work at home. Since your use of the computer is not for
the convenience of your employer and is not required as a condition of
your employment, you cannot claim a depreciation deduction for it.
Which depreciation method to use.
You generally must depreciate your computer or cellular telephone
using the straight line method over the Alternative Depreciation
System (ADS) recovery period. You cannot take a section 179 deduction
for the item or claim an accelerated depreciation deduction using the
General Depreciation System (GDS) unless you meet the
more-than-50%-use test. (But if you use your computer in a home
office, see the exception below.) The section 179 deduction and
depreciation deductions using ADS and GDS are explained in
Publication 946.
More-than-50%-use test.
You meet this test if you use the computer or cellular telephone
more than 50% in your work. If you meet this test, you can take a
section 179 deduction for the item and you can claim accelerated
depreciation using GDS.
Your use of a computer or cellular telephone in connection with
investments (described later under Other Expenses) does
not count as use in your work. However, you can combine your
investment use with your work use in figuring your depreciation
deduction.
For more information, see Predominant Use Test in
chapter 4 of Publication 946.
Exception for computer used in a home office.
The more-than-50%-use test does not apply to a computer used only
in a part of your home that meets the requirements described later
under Home Office. You can take a section 179 deduction and
claim accelerated depreciation using GDS for a computer used in a
qualifying home office, even if you do not use it more than 50% in
your work.
For more information on depreciation and section 179 deductions for
computers and other items used in a home office, see Business
Furniture and Equipment in Publication 587.
Reporting your depreciation deduction.
Use Part V of Form 4562, Depreciation and Amortization,
to claim the depreciation deduction for a cellular telephone or for a
computer that you did not use only in your home office. Complete Part
I of Form 4562 if you are claiming a section 179 deduction.
Computer used in a home office.
Use Part II of Form 4562 to claim the depreciation deduction for a
computer you placed in service during 2001 and used only in your home
office. Complete Part I of Form 4562 if you are claiming a section
179 deduction.
Do not use Form 4562 to claim the depreciation deduction for a
computer you placed in service before 2001 and used only in your home
office, unless you are otherwise required to file Form 4562. Instead,
report the depreciation directly on the appropriate form. (See
How To Report, later.) But if you are otherwise required to
file Form 4562, report the depreciation in Part III.
You must keep records to prove your percentage of business and
investment use.
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:
- Conduct entertainment activities for members or their
guests, or
- 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 Lobbying Expenses
under Nondeductible Expenses, later.
Education That Is Work Related
You can deduct expenses you have for education, even if the
education may lead to a degree, if the education meets at least one of
the following two tests.
- It maintains or improves skills required in your present
work.
- It is required by your employer or the law to keep your
salary, status, or job, and the requirement serves a business purpose
of your employer.
If your education meets either of these tests, you can deduct
expenses for tuition, books, supplies, laboratory fees, and similar
items, and certain transportation costs.
You cannot deduct any qualified education expenses that were used
to determine the amount of an education tax credit or any other tax
benefit for education. See Publication 970,
Tax Benefits for
Higher Education.
Nondeductible educational expenses.
You cannot deduct expenses you have for education, even though one
or both of the preceding tests are met, if the education:
- Is needed to meet the minimum educational requirements to
qualify you in your work or business, or
- Will lead to qualifying you in a new trade or business.
If the education qualifies you for a new trade or business, you
cannot deduct the educational expenses even if you do not intend to
enter that trade or business.
Travel as education.
You cannot deduct the cost of travel that in itself constitutes a
form of education. For example, a French teacher who travels to France
to maintain general familiarity with the French language and culture
cannot deduct the cost of the trip as an educational expense.
More information.
Get Publication 508,
Tax Benefits for Work-Related Education,
for a complete discussion of the deduction for work-related
educational expenses.
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:
- As your principal place of business for any trade or
business,
- As a place to meet or deal with your patients, clients, or
customers in the normal course of your trade or business, or
- 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.
Principal place of business.
If you have more than one place of business, the business part of
your home is your principal place of business if:
- You use it regularly and exclusively for administrative or
management activities of your trade or business, and
- You have no other fixed location where you conduct
substantial administrative or management activities of your trade or
business.
Otherwise, the location of your principal place of business
generally depends on the relative importance of the activities
performed at each location and the time spent at each location.
You should keep records
that will give the information
needed to figure the deduction according to these rules. Also keep
canceled checks or account statements and receipts of the expenses
paid to prove the deductions you claim.
More information.
Get Publication 587
for more detailed information and a worksheet
for figuring the deduction.
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:
- You are looking for a job in a new occupation,
- There was a substantial break between the ending of your
last job and your looking for a new one, or
- 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 Publication 525.
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.
R�sum�.
You can deduct amounts you spend for typing, printing, and mailing
copies of a r�sum� 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 may choose to use the standard mileage rate to figure your car
expenses. The standard mileage rate for 2001 is 34.5 cents per mile.
See Publication 463
for more information on travel and car expenses.
Legal Fees
You can deduct legal fees related to doing or keeping your job.
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 your 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, get Publication 946.
Travel, Transportation, Meal, Entertainment, and Gift
Expenses
If you are an employee and have ordinary and necessary
business-related expenses for travel away from home, local
transportation, entertainment, and gifts, you may be able to deduct
these expenses. Generally, you must file Form 2106 or 2106-EZ
to claim these expenses.
Travel expenses.
Travel expenses are those incurred while traveling away from home
for your employer. You can deduct travel expenses paid or incurred in
connection with a temporary work assignment. Generally, you cannot
deduct travel expenses paid or incurred in connection with an
indefinite work assignment.
Travel expenses may include:
- The cost of getting to and from your business destination
(air, rail, bus, car, etc.),
- Meals and lodging while away from home,
- Taxi fares,
- Baggage charges, and
- Cleaning and laundry expenses.
Travel expenses are discussed more fully in chapter 1 of
Publication 463.
Temporary work assignment.
If your assignment or job away from home in a single location is
realistically expected to last (and does in fact last) for 1 year or
less, it is temporary, unless there are facts and circumstances that
indicate it is not.
Indefinite work assignment.
If your assignment or job away from home in a single location is
realistically expected to last for more than 1 year, it is indefinite,
whether or not it actually lasts for more than 1 year.
Employment that is initially temporary may become indefinite due to
changed circumstances.
Federal crime investigation and prosecution.
If you are a federal employee participating in a federal crime
investigation or prosecution, you are not subject to the 1-year rule
for deducting temporary travel expenses. This means that you may be
able to deduct travel expenses even if you are away from your tax home
for more than one year.
To qualify, the Attorney General must certify that you are
traveling:
- For the federal government,
- In a temporary duty status, and
- To investigate, prosecute, or provide support services for
the investigation or prosecution of a federal crime.
Local transportation expenses.
Local transportation expenses are the expenses of getting from one
workplace to another when you are not traveling away from home. They
include the cost of transportation by air, rail, bus, taxi, and the
cost of using your car.
You may choose to use the standard mileage rate to figure your car
expenses. The standard mileage rate for 2001 is 34 1/2
cents per mile
Work at two places in a day.
If you work at two places in a day, whether or not for the same
employer, you can generally deduct the expenses of getting from one
workplace to the other.
Temporary workplace.
You can deduct expenses incurred in going between your home and a
temporary workplace if at least one of the following applies.
- The workplace is outside the metropolitan area
where you live and normally work.
- You have at least one regular workplace (other
than your home) for the same trade or business. (If this applies, the
distance between your home and the temporary workplace does not
matter.)
For this purpose, a workplace is generally considered temporary if
your work there is realistically expected to last (and does in fact
last) for 1 year or less. It is not temporary if your work there is
realistically expected to last for more than 1 year, even if it
actually lasts for 1 year or less. If your work there initially is
realistically expected to last for 1 year or less, but later is
realistically expected to last for more than 1 year, the workplace is
generally considered temporary until the date your realistic
expectation changes and not temporary after that date. For more
information, see chapter 4 of Publication 463.
Home office.
You can deduct expenses incurred in going between your home and a
workplace if your home is your principal place of business
for the same trade or business. (In this situation, whether the other
workplace is temporary or regular and its distance from your home do
not matter.) See Home Office, earlier, for a discussion on
the use of your home as your principal place of business.
Meals and entertainment.
Generally, you can deduct entertainment expenses (including
entertainment- related meals) only if they are directly related
to the active conduct of your trade or business. However, the
expense only needs to be associated with the active conduct
of your trade or business if it directly precedes or follows a
substantial and bona fide business-related discussion.
You can deduct only 50% of your business-related meal and
entertainment expenses unless the expenses meet certain exceptions.
You apply this 50% limit before you apply the
2%-of-adjusted-gross-income limit.
Meals when subject to "hours of service" limits.
You can deduct 60% of your business-related meal expenses if you
consume the meals during or incident to any period subject to the
Department of Transportation's "hours of service" limits. You
apply this 60% limit before you apply the 2%-of-adjusted-gross-income
limit.
Beginning in 2002, this limit increases by 5% every two years until
it reaches 80% in 2008.
Gift expenses.
You can generally deduct up to $25 of business gifts you give to
any one individual during the year. The following items do not count
toward the $25 limit.
- Identical, widely distributed items costing $4 or less that
have your name clearly and permanently imprinted.
- Signs, racks, and promotional materials to be displayed on
the business premises of the recipient.
Additional information.
Get Publication 463
for more information on travel,
transportation, meal, entertainment, and gift expenses, and
reimbursements for these expenses.
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.
- You must wear them as a condition of your employment.
- The clothes are not suitable for everyday wear.
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 that 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.
If you are a student at an armed forces academy, you cannot deduct
the cost of your uniforms if they replace regular clothing. However,
you can deduct the cost of insignia, shoulder boards, and related
items.
You can deduct the cost of your uniforms if you are a civilian
faculty or staff member of a military school.
Tax Preparation Fees
You can usually deduct tax preparation fees in the year you pay
them. Thus, on your 2001 return, you can deduct fees paid in 2001 for
preparing your 2000 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.
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 expenses of preparing the remainder of
the return on line 21, Schedule A (Form 1040).
Other Expenses
You can deduct certain other expenses as miscellaneous itemized
deductions subject to the 2%-of- adjusted-gross-income limit. These
are expenses you pay:
- To produce or collect income that must be included in your
gross income,
- To manage, conserve, or maintain property held for producing
such income, or
- 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.
These other expenses include the following items.
- Appraisal fees for a casualty loss or charitable
contribution.
- Casualty and theft losses from property used in performing
services as an employee.
- Clerical help and office rent in caring for investments.
- Depreciation on home computers used for investments.
- 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 of pass-through entities.
- Investment fees and expenses.
- Legal fees related to producing or collecting taxable income
or getting tax advice.
- Loss on deposits in an insolvent or bankrupt financial
institution.
- Repayments of income.
- Repayments of social security benefits.
- Safe deposit box rental.
- Service charges on dividend reinvestment plans.
- Tax advice and preparation fees, including fees for
electronic filing.
- Trustee's fees for your IRA, if separately billed and paid.
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. Your
deduction is the amount of the loss included on lines 32 and 38b of
Form 4684 and line 18b of Form 4797. For more information on casualty
and theft losses, see Publication 547,
Casualties, Disasters,
and Thefts.
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 Depreciation on Computers or Cellular
Telephones under Unreimbursed Employee
Expenses,earlier. For more information on depreciation, 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
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 columns (d) and (e) of Schedule D (Form 1040) 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 Not-for-Profit Activities in
chapter 1 of Publication 535.
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:
- Continuously offered pursuant to a public offering,
- Regularly traded on an established securities market,
or
- 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, 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, Dividends
and Distributions, 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:
- 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,
- 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
- 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.
Loss on Deposits
If you can reasonably estimate the amount of your loss on money
deposited in a bankrupt or insolvent financial institution, you can
generally choose to deduct it in the current year even though its
exact amount has not been finally determined. Once you make this
choice, you cannot change it without IRS approval.
If none of the deposit is federally insured, you can deduct the
loss in either of the following ways.
- As a miscellaneous itemized deduction subject to the 2%
limit. Write the name of the financial institution and "Insolvent
Financial Institution" beside the amount on Schedule A, line 22.
This deduction is limited to $20,000 ($10,000 if you are married
filing separately) for each financial institution, reduced by any
expected state insurance proceeds.
- As a casualty loss. See Publication 547
for details.
If any part of the deposit is federally insured, you can deduct
the loss only as a casualty loss.
Exception.
You cannot make this choice if you are a 1%-or-more-owner or an
officer of the financial institution, or are related to such owner or
officer. For a definition of "related," see Deposit in
Insolvent or Bankrupt Financial Institution in chapter 4 of
Publication 550.
Actual loss different from estimated loss.
If you make this choice and your actual loss is less than your
estimated loss, you must include the excess in income. See
Recoveries in Publication 525.
If your actual loss is more
than your estimated loss, treat the excess loss as explained under
Choice not made, next.
Choice not made.
If you do not make this choice (or if you have an excess actual
loss after choosing to deduct your estimated loss), treat your loss
(or excess loss) as a nonbusiness bad debt (deductible as a short-term
capital loss) in the year its amount is finally determined. See
Nonbusiness Bad Debts in chapter 4 of Publication 550.
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
If the total of the amounts in box 5 (net benefits for 2001) of all
your Forms SSA-1099, Social Security Benefit Statement,
and Forms RRB-1099, Payments By the Railroad
Retirement Board, is a negative figure (a figure in
parentheses), you may be able to take a miscellaneous itemized
deduction subject to the 2% limit. The amount you can deduct is the
part of the negative figure that represents an amount you included in
gross income in an earlier year.
The amount in box 5 of Form SSA-1099 or RRB-1099 is
the net amount of your benefits for the year. It will be a negative
figure if the amount of benefits you repaid in 2001 (box 4) is more
than the gross amount of benefits paid to you in 2001 (box 3).
If the deduction is more than $3,000, you will have to use a
special computation to figure your tax. Get Publication 915,
Social Security and Equivalent Railroad Retirement Benefits,
for additional information.
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:
- Holding shares acquired through a plan,
- Collecting and reinvesting cash dividends, and
- 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 IRA are deductible (if they are
ordinary and necessary) as a miscellaneous itemized deduction subject
to the 2% limit.
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