You will only receive a tax benefit from your miscellaneous itemized deductions to the extent that they exceed, in aggregate, 2% of your adjusted gross income (AGI). You may have found over the years that while you may have had otherwise deductible expenses, you received no tax benefit for the expenses because you did not have enough to exceed the floor. By bunching these expenses into a single year you may be able to exceed this “floor,” and therefore, receive a tax benefit for the expenses. So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.
Should you bunch into 2016 or defer into 2017?
If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:
- Deductible investment expenses, including advisory fees, custodial fees and publications;
- Professional fees, such as tax planning and preparation, accounting, and certain legal fees; and
- Unreimbursed employee business expenses, including vehicle costs, travel, and allowable meals and entertainment.
If you will not exceed the floor, you should consider delaying expenses until next year, i.e. bunching your expenses in 2017.
Beware of the AMT
Miscellaneous itemized deductions aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you expect to be subject to the AMT this year.
Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).
If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, contact me at HZemel@berdonllp.com or your Berdon advisor.
Hal Zemel, a Tax Principal at Berdon LLP, New York Accountants, has more than 20 years in public accounting and advises businesses in the real estate, service, and manufacturing sectors.