If you’re like most real estate pros, you itemize your deductions on your tax return.
When many people think of itemized deductions, they only consider the big three: the deductions for home mortgage interest, state and local income and property taxes, and charitable contributions.
However, itemized deductions are not limited to the big three.
A large group of deductions is lumped together in a category called "miscellaneous itemized deductions." They’re deductible only to the extent they exceed 2 percent of a taxpayer’s adjusted gross income (AGI).
Example: Ladonna, a single real estate agent, has an adjusted gross income of $100,000. She may deduct her miscellaneous itemized deductions only to the extent that they exceed 2 percent of $100,000, or $2,000.
This year she had $100 in tax preparation fees, $500 in investment expenses, $1,000 in charitable contributions, and $10,000 in mortgage interest and property tax deductions. Her total miscellaneous itemized deductions are $11,600, but because of the 2 percent of AGI limit, she may only deduct $8,600 of this amount-the amount that exceeds $2,000.
The following expenses are deductible as miscellaneous itemized deductions if and to the extent they all together exceed 2 percent of your adjusted gross income (AGI). If you itemize, make sure to see if you can include these deductions along with one or more of the big three.
Investment Expenses. You can earn money by engaging in personal investing — for example, by having personal bank accounts that pay interest, or investing in stocks that pay dividends and appreciate in value over time (hopefully). The IRS calls activities like these — that are pursued primarily for profit, but aren’t businesses — income-producing activities.
You can deduct the ordinary and necessary expenses you incur to produce income, or to manage property (including real estate) held for the production of income. These expenses include such items as clerical help and office rent for investment-related work, investment fees and expenses, legal and tax advice, rental fees for a safe deposit box if it is not used to store jewelry and other personal effects, and more.
Tax preparation fees. This includes costs for hiring a tax pro or buying tax preparation software or tax publications. It also includes any fee you pay for electronic filing of your return.
If you have a tax pro prepare both your personal and business taxes, ask for a separate bill for your business return. Reason: This amount will be fully deductible as a business expense whether or not you itemize your deductions, but the costs of preparing your personal return are deductible only as a miscellaneous itemized deduction and subject to the 2 percent of AGI threshold.
Fees to fight the IRS. You may deduct attorney fees, accounting fees, and other fees you incur to determine, contest, pay, or claim a refund of any tax.
Gambling losses. These are deductible up to the amount of your gambling winnings for the year. You cannot simply reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. These losses are not subject to the 2 percent limit on miscellaneous itemized deductions.
Hobby expenses. A hobby is an activity you engage in primarily for a reason other than to earn a profit — for example, to have fun. Expenses from a hobby are deductible only if you have income from the hobby and only up to the amount of hobby income earned during the year.
You should keep records of your expenses for miscellaneous itemized deductions throughout the year. They can be worth a lot.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.