Tier 2 expenses must be reduced by 2% of AGI before they are deducted on Schedule A and they are not allowed at all for AMT computation purposes. They include such expenses as professional dues, qualified job-related educational expenses, malpractice insurance premiums, job-seeking expenses, employee office-in-home expenses, professional periodical subscriptions, uniforms, union dues, the deductible portion of unreimbursed business meals, expenses related to the production of income, tax preparation fees, and appraisal fees related to property given to charity or involved in a casualty loss.

For years before 2018 and after 2025, generally tax preparation fees, including the costs of electronic filing, paid by the taxpayer are deductible as Tier 2 expenses. This would also include the purchase of tax preparation software, guides, and instructions. If the taxpayer is self-employed or has rental income property an allocated amount of the tax preparation fees may be deductible on those schedules in lieu of Schedule A. Such allocation continues to be allowed during the 2018-2025 suspension period.

Credit or debit card convenience fees charged for paying federal individual income taxes electronically are deductible as a Tier 2 itemized deduction for years before 2018 and after 2025. (IR-2009-37)

(Also see Chapter 7.9 – Legal Expenses) – Other than for years 2018-2025, an individual can usually deduct legal expenses incurred in attempting to produce or collect taxable income or paid in connection with the determination, collection, or refund of any tax. The following legal expenses are also deductible:

For years other than 2018-2025, the cost and upkeep of work clothing is deductible if the following two requirements are met.

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. IRS contends that white bib overalls and standard shoes, such as a painter might wear, are not distinctive in character or in the nature of a uniform.

The costs of protective clothing required for work, such as safety shoes or boots, safety glasses, hard hats and work gloves, are deductible. Examples of workers who may require safety items include carpenters, chemical workers, machinists, oil field workers, pipe fitters, and truck drivers.

Taxpayers generally cannot deduct the cost of uniforms if they are on full-time active duty in the armed forces. However, armed forces reservists can deduct the unreimbursed cost of uniforms if military regulations restrict the taxpayers from wearing it except while on duty as a reservist. A student at an armed forces academy cannot deduct the cost of uniforms if they replace regular clothing. However, the cost of insignia, shoulder boards, and related items are deductible. Civilian faculty and staff members of a military school can deduct the cost of uniforms. Deductions related to military uniforms are suspended for 2018-2025.

Only gifts given during a trade or business are deductible and then they are generally limited to $25 per year per person (recipient). (IRC Sec 274(b); Reg. 1.274-3) These expenses would be deducted on Schedule C, E or F, as appropriate. For employees, these are Tier 2 deductions that are suspended for 2018-2025.

If an employee uses his car for business purposes in years other than 2018-2025, he may be able to deduct car expenses as a Tier 2 itemized deduction. Generally, one of the two following methods is used to figure deductible auto expenses.

Details and options relating to the deduction for the business use of the taxpayer’s vehicle is complicated and covered separately in Chapter 3.12.

As a result, many taxpayers are unable to deduct their employee business expenses. However, there are two possible strategies that may help an employee recover some or all of these expenses.

The simplest way is for the employee to negotiate an accountable reimbursement plan with his or her employer. This will allow the employer to provide the employee with nontaxable reimbursement for the expenses. Depending upon the employer’s attitude, the employee might need to accept a pay reduction approximately equal to the expense reimbursement.

Another possible strategy involves business assets that must be depreciated. By minimizing the depreciation deductions each year, when the business assets are sold or scrapped, the business basis will be higher than it would be if accelerated depreciation or Sec. 179 deductions were claimed. As a result, a potential deductible business loss has been created. Since the gain or loss from the sale of business assets is treated as income or loss on the face of the tax return, there is no need to itemize to benefit from a loss from the sale of the business asset.

The business asset most likely to fall into this category is the business-use portion of the employee’s vehicle. To gain any benefit, the sale must result in a loss. The benefit will vary depending on three variables unique to each situation: the cost of the vehicle, how much depreciation was allowed or allowable for its business use, and the vehicle’s sale price.

In the example, the standard mileage rate was used with an imputed depreciation rate of 24 cents per mile (see Chapter 3.11 for a table of actual recent-year rates). Using the standard mileage rate minimizes the taxpayer’s recordkeeping and produces a low depreciation component. The taxpayer must account for depreciation when selling the vehicle, even though no benefit was derived. The tax benefit rule does not apply to depreciation. (Reg § 1.111-1(a))

Other than for years 2018-2025 - If a taxpayer does not carry on an activity for profit (in other words, it is a hobby), the taxpayer may deduct their hobby expenses, up to the amount of any hobby income, as a Tier 2 itemized deduction. Thus, hobby income is reported on their 1040 (via Schedule 1, line 8i on the 2021 version), and, except for years 2018-2025, any expenses, not exceeding the hobby income, are deductible as miscellaneous itemized deductions on Schedule A, assuming the taxpayer is not claiming the standard deduction, in which case they would be reporting income but not deducting the expenses. For 2018-2025, none of the hobby expenses are deductible, so all of the hobby income will be taxable. See Chapter 3.3 for information on “Profit Motive.”

Expenses looking for a new job in the taxpayer’s current occupation are deductible (other than for years 2018-2025), even if a new job is not obtained. To be deductible, the expenses cannot be to look for a job in a new occupation or for a first job. If there is a substantial time gap between the taxpayer’s last job and when the search for a new job occurs, the expenses are not allowed.

The types of expenses that are deductible if looking for a new job in the same occupation include:

Investment fees, custodial fees, trust administration fees (for revocable trusts), and other expenses paid for managing investments that produce taxable income are deductible in years other than 2018-2025. However, the fees are only deductible for the production of taxable income and are not deductible for the production of non-taxable investment income. Where the expenses are for the production of both taxable and nontaxable income, an allocation must be made.

Some performing artists are allowed to deduct their employment-related expenses as an adjustment to gross income, thus avoiding the 2%-of-AGI reduction on these expenses. This abovethe-line deduction is unchanged by the TCJA. In order for these taxpayers to qualify for this special rule, all of the following must be met:

Performing arts related expenses are not deducted on Schedule A; they are transferred from Form 2106 to Form 1040, Schedule 1, line 12 (2021).

Employee business expenses of an official of a state or local government are deductible in computing AGI, if the official is compensated in whole or in part on a fee basis. The officials for whom this provision is intended are those who provide certain services to the government, and who hire employees and incur expenses in connection with their official duties. Since these expenses are deductions “above-the-line,” they are also deductible for AMT purposes.

See Chapter 3.11 – Meals & Entertainment

(Also see Chapter 3.16 – Home Office) – If an employee uses a part of his home regularly and exclusively for business purposes, in years other than 2018-2025, he may be able to deduct a part of the operating expenses and depreciation of the home, or $5 per business-use square foot, up to 300 square feet, if using the simplified method. He can claim this deduction for the business use of a part of the home only if that part of the home is used regularly and exclusively:

The regular and exclusive business use must be for the convenience of the taxpayer’s employer and not just appropriate and helpful in the taxpayer’s job.

Job-related educational expenditures are deductible by an employee as Tier 2 miscellaneous deductions (in years other than 2018-2025) or on Schedule C for a self-employed individual. Some job-related education expenses may qualify for the American Opportunity Credit or Lifetime Learning credits. The same expense, however, cannot be used for more than one tax benefit.    

Note: Educators are allowed to deduct expenses for classes on a new subject they will teach or for training for a school counseling or administrative job. For teachers, this is all considered one line of work.

The recordkeeping requirements are the same for education as for other employee business expenses. The kind of records necessary depends on the nature of the expense (local, away-fromhome, etc.).

To the extent a VA (Veterans Affairs) allowance represents “subsistence” payments, it is not taxable AND does not reduce expenses. Any VA allowance intended to offset actual educational expenses reduces the expense deduction. Rev Rul 83-3states that VA benefits paid under 38 USC Section 1677 (1976) are direct reimbursements of education expenses, and benefits under 38 USC Section 1681 (1979) are half for subsistence and half to reimburse expenses.

Generally, the IRS has taken the position that “Travel as a Form of Education” for teachers and educators is not an allowable education expense. However, in the court case Jorgenson, TC Memo 2000138, a high school English teacher was allowed foreign travel as an educational expense when that travel was part of a structured course offered by an education institution. In this particular case, the taxpayer enrolled in courses offered by UC Berkeley and UC Extension. One course entitled “Legendary Greece” involved extensive travel in Greece and another entitled “Southeast Asia, Sacred Places” involved travel to Thailand, Cambodia and Indonesia. The IRS took the position the education was travel as a form of education and therefore not deductible. The court disagreed and determined the courses were academic courses that:

Thus, a distinction must be made between travel itself being a form of education (expenses not deductible) and when an individual travels away from home primarily to obtain education (education expenses are deductible). In the latter case the individual's expenditures for travel, meals, and lodging while away from home are deductible.

Variable annuities typically invest in a variety of stock funds, money market accounts, etc. After the original investment, the annuity may have declined in value and will be worth less today than its original cost.

If the annuity is a non-qualified annuity and is surrendered in a cash-out transaction in a year other than 2018-2025, the loss from the annuity can be claimed as a miscellaneous deduction subject to the 2%-of-adjusted-gross-income limit. (2017 IRS Pub 575, pg. 22)