You can deduct the following 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 (Form 1040) by subtracting 2% of your adjusted gross income from the total amount of these expenses. Your adjusted gross income is the amount on line 33, Form 1040.

Generally, you apply the 2% limit after you apply any other deduction limit. For example, the 50% (or 55%) limit on business-related meals and entertainment (discussed in chapter 28) is applied before you subtract 2% of your adjusted gross income.

Deductions subject to the 2% limit are discussed in the two general categories that are shown on Schedule A (Form 1040): unreimbursed employee expenses and other expenses.

Performing artists. If you are a qualifying performing artist, you may be able to deduct your employee business expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. See Special Rules in chapter 28 if you need more information about this exception.

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.

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:

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 business expenses.

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 unreimbursed business expenses.

• Business bad debt of employee.
• Education that is employment related (see chapter 29).
• Laboratory breakage fees.
• Licenses and regulatory fees.
• Malpractice insurance premiums.
• Medical examinations required by employer.
• Occupational taxes.
• Passport for business trip.
• Subscriptions to professional journals and trade magazines related to your work.
• Travel, transportation, entertainment, gift, and car expenses related to your work (see chapter 28).

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

If you purchased a computer or cellular telephone, you can claim a depreciation deduction if you use these items in your work as an employee and you meet the following two tests. Your use of these items must be:

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 Chamber 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.

See Club Dues under Nondeductible Expenses for more information.

Dues paid to airline, hotel, and luncheon clubs are not deductible.

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.

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 cannot deduct any part of your personal expenses that are for family household purposes.

Requirements for employees claiming the deduction. You can deduct certain expenses for the business use of a part of your home only if you use that part of your home regularly and exclusively as:

1. Your principal place of business for any trade or business in which you engage, or
2. A place to meet or deal with your patients, clients, or customers in the normal course of your trade or business.

You can also deduct certain expenses for a separate structure not attached to your home if you use it regularly and exclusively for 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, or
2. There was a substantial break between the ending of your last job and your looking for a new one.

You cannot deduct your expenses if you are seeking employment 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 13).

Employer pays the employment agency. If your employer pays the fees directly to the employment agency and you were not responsible for them, you do not include them in your gross income.

Resum�. You can deduct amounts you spend for typing, printing, and mailing copies of a resum� to prospective employers if you were 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 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.

If you use the standard mileage rate to figure your car expenses, use 32.5 cents per mile. See chapter 28 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.

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 one year from the date of purchase. You can depreciate the cost of tools expected to last more than a year. For more information about depreciation, get 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 such 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. They 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 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.

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.

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:

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 other 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.

Casualty and Theft Losses

You can deduct casualty and theft losses from property used in performing services as an employee.

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, managing your investments that produce taxable income). If you work as an employee and use the computer in that work, see Publication 946.

Excess Deductions of an Estate

If the total deductions in the estate's last tax year are more than the estate's gross income for that year, the beneficiaries succeeding to the estate's property can claim such excess as a miscellaneous deduction. Do not include deductions for personal exemptions and charitable contributions when figuring the 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 Publication 559.

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 unless you are a dealer in securities. You must offset the fee against the selling price.

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 13 under Miscellaneous Taxable Income.

Indirect Deductions of Pass-Through Entities

Pass-through entities include partnerships, S corporations, and mutual funds. Deductions of pass-through entities are passed through to the partners or shareholders. If the deductions are miscellaneous itemized deductions, they are generally subject to the 2% limit.

Information returns. You should receive information returns from pass-through entities. Partnerships and S corporations issue Schedule K-1, which lists the items and amounts you must report, and identifies the tax return schedules and lines to use.

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 a miscellaneous itemized deduction 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. You should receive a copy of Schedule K-1 (Form 1065), Partner's Share of Income, Credits, Deductions, etc.

Allocated expenses of mutual funds. The allocable investment expenses of nonpublicly offered mutual funds are subject to the 2% limit. Publicly offered mutual funds do not pass investment expenses through to shareholders.

A "publicly offered" mutual fund is one that 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.

Contact your mutual fund if you are not sure if your fund is publicly offered.

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.

Publicly offered mutual funds. These funds 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.

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 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 the expenses of resolving nonbusiness tax issues on Schedule A (Form 1040).

Loss on Deposits in an Insolvent or Bankrupt Financial Institution

For information on whether, and if so, how you may deduct a loss on your deposit in a qualified financial institution, see Loss on deposits in an insolvent or bankrupt financial institution in chapter 15.

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 is 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 12.

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.

Tax Preparation Fees

You can usually deduct tax preparation fees in the year you pay them. Thus, on your 1998 return, you can deduct fees paid in 1998 for preparing your 1997 return.

These fees include the cost of tax preparation software programs and tax publications. It also includes 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 the expenses of preparing the remainder of the return on line 21, Schedule A (Form 1040).

Trustee's Administrative Fees for IRA

You can deduct an IRA trustee's administrative fees that are billed separately and that you paid in connection with your individual retirement arrangement (IRA). They are deductible (if they are ordinary and necessary) as a miscellaneous deduction on Schedule A (Form 1040). For more information about IRAs, see chapter 18.

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