What falls within the classification of expenses?

One of the biggest and most dramatic changes affecting taxpayers with the passage of the 2017 Tax Cuts and Jobs Act is the repeal of many of the following deductions beginning 2018 through 2025. All were previously reported on Schedule A, Form 1040.  The various expenses that may or may not be claimed are listed in Publication 529.

Production of Income with Real Property

Pre-2018 law: Under IRS law, “On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 11, you can deduct expenses that you pay…To manage, conserve, or maintain property held for producing such income.” This means that any rental properties including houses, apartments and office space are subject to this deduction. According to the IRS, this includes damage to fixtures on the property by renters, investment fees, costs for repairs such as broken water lines, upgrades to property such as solar panels, and any unpaid rent (bad debt).

Production of Income with Tax Preparation

Pre-2018 law: Under IRS law, “On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 11, you can deduct expenses that you pay…To produce or collect income that must be included in your gross income (and) To determine, contest, pay, or claim a refund of any tax.” Under this provision when a client fails to send you the correct tax document, you can deduct the time and expenses incurred for tracking down that client and obtaining the correct paperwork. In addition, you can hire a tax professional to do your taxes at the end of the year and their fee will be deducted as well. You can also deduct the fees for filing a return electronically. If you paid your tax by debit or credit card, you can also deduct the convenience fee. The purpose behind this rule by the IRS is to encourage accurate accounting. Remember that the audit process is expensive for both you and the IRS.

Other Examples of Production of Income Deductions

The following itemized deductions are gone, effective for tax years 2018 through 2025:

• 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 from 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.
• Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you.
• Repayments of income.
• Repayments of social security benefits.
• Safe deposit box rental.
• Service charges on dividend reinvestment plans.
• Tax preparation fees.
• Trustee’s fees for your IRA, if separately billed and paid.

Case Studies: Classification of Expenses

Case Study 1: Rental Property Expenses

John owns multiple rental properties and incurs various expenses related to managing and maintaining them. These expenses include repairs, upgrades, and unpaid rent. Under the previous tax law, John was able to deduct these expenses on Schedule A, Form 1040. However, with the repeal of this deduction starting in 2018, John must adjust his tax planning strategy to account for the loss of these deductions.

Case Study 2: Tax Preparation Expenses

Sarah, a self-employed individual, hires a tax professional to assist with her tax preparation and filing. She also incurs costs associated with tracking down missing tax documents from clients. Previously, Sarah could deduct these tax preparation expenses on Schedule A, Form 1040. However, under the updated tax law, this deduction is no longer available. Sarah now needs to consider the impact of these changes on her tax liabilities and budget accordingly.

Case Study 3: Other Itemized Deductions

Emily, a taxpayer, used to claim several other itemized deductions that are no longer available under the revised tax law. These deductions include unreimbursed employee expenses, tax preparation fees, and certain miscellaneous deductions. With the elimination of these deductions, Emily needs to reassess her tax planning strategies and explore alternative ways to manage her expenses effectively.