On Schedule A (Form 1040), you may be able to deduct a portion of miscellaneous expenses covering a wide and varied range of items, such as employee travel and entertainment expenses, work clothes expenses, union and employee professional dues, investment expenses, legal expenses, tax preparation expenses, and educational expenses. They share a significant limitation: the 2% of adjusted gross income (AGI) floor (19.1). If your expenses do not exceed this floor, you may not deduct them. If the expenses exceed the floor, only the excess is deductible. Even before applying the 2% of AGI floor, employees who incur unreimbursed meal and entertainment costs must reduce their meal and entertainment costs by 50% (20.25).

After applying the 2% floor, the net deduction may be further reduced on Schedule A if you are subject to the overall reduction of itemized deductions that applies to certain higher income taxpayers (13.7). In addition, the net deduction after the 2% floor must be added back to income in determining if you are subject to AMT (23.2) and if you are, the benefit of the Schedule A deduction is effectively lost.

Some miscellaneous expenses, such as gambling losses and impairment-related work expenses, are not subject to the 2% of AGI floor (19.5). However, with the exception of gambling losses and casualty and theft losses from investment property, such deductions are subject to the reduction of itemized deductions that applies to certain higher income taxpayers (13.7).

19.1 2% of AGI Floor Reduces Most Miscellaneous Expenses

A floor of 2% of adjusted gross income (AGI) applies to the total of most miscellaneous deductions that are claimed on Schedule A of Form 1040. AGI is the amount on Lines 37 and 38 of Form 1040. The purpose of the floor is to reduce or eliminate such deductions. The 2% of AGI floor is applied on Line 26 of Schedule A. Only expenses above the floor are deductible.

Taxpayers with adjusted gross income over the applicable annual threshold ($156,900, $261,500, $287,650, or $313,800, depending on filing status for 2017) are also subject to the reduction to overall itemized deductions (13.7). Thus, any miscellaneous expenses that are allowed after applying the 2% floor (the allowable amount on Line 27 of Schedule A) will be further reduced if the reduction to overall itemized deductions applies; see 13.7.

The expenses subject to the 2% of AGI floor are shown below. Some miscellaneous expenses are not subject to the 2% floor; these are discussed in 19.5.

Miscellaneous expenses subject to the 2% of AGI floor include:

• Unreimbursed travel, meals, and entertainment expenses of employees on trips away from home (20.1 and 20.30)
• Taxable reimbursements of job expenses or taxable expense allowances under non-accountable plans(20.34)
• Unreimbursed local transportation costs of visiting clients or customers(19.9)
• Union dues(19.6)
• Professional and business association dues(19.6)
• Work clothes expenses(19.7)
• Cost of looking for a new job(19.8)
• Job agency fees(19.8)
• Tax advice and preparation fees(19.17)
• Appraisal fees related to casualty losses and charitable property contributions(19.17)
• Investment costs, e.g, IRA custodial fees, safe-deposit rentals, and fees to investment counselors(19.16)
• Employee home office expenses(19.14)
• Legal fees for recovering taxable job-related or personal damages(19.18)
• Work-related education costs(33.15)
• Business bad debt on a loan made to your employer to protect your job (5.33)

19.2 Effect of 2% of AGI Floor on Miscellaneous Deductions

Because of the 2% of AGI floor, you may be unable to deduct some or all of your miscellaneous (19.1) deductions. For example, if your AGI is $65,000, miscellaneous expenses of up to $1,300 (2% of $65,000) will not be allowed.

19.3 Checklist of Job Expenses Subject to the 2% of AGI Floor

The following expenses that are job related—ranging from professional dues and subscriptions to employment agency fees—are subject to the 2% of AGI floor and so you may be unable to deduct them (19.2). Generally, you must file Form 2106 to claim job-related expenses that were not reimbursed by your employer. After entering your expenses and any reimbursements on Form 2106, transfer the allowable amount to Line 21 of Schedule A (unreimbursed employee expenses), where it is subject to the 2% of AGI floor along with other miscellaneous deductions (19.1). If you are using the standard mileage rate (43.1) for your vehicle expenses, and you were not reimbursed by your employer for any job expenses, you may file Form 2106-EZ to report your auto and other job expenses.

You may enter your unreimbursed expenses directly on Line 21 of Schedule A without having to complete Form 2106 or Form 2106-EZ if you are not claiming any job-related travel, local transportation, meal, or entertainment expenses and you received no employer reimbursement at all for any of your other job costs (such as education expenses, union dues, or uniforms).

• Airfares (20.5)
• Auto club membership (43.2)
• Auto expenses (19.4, 43.1)
• Books used on the job (19.6)
• Bond costs (19.16)
• Business bad debt for loan to employer (5.33)
• Car insurance premiums (43.2)
• Cleaning costs (19.7)
• Commerce association dues (19.6)
• Commuting costs (20.2)
• Computers (19.11)
• Convention trips (20.12, 20.14)
• Depreciation (42.1)
• Dues (19.6)
• Educational expenses (33.14-15)
• Employment agency fees (19.8)
• Entertainment expenses (20.15–20.29)
• Equipment (19.11–19.13)
• Foreign travel costs (20.11, 20.14)
• Furniture (19.14)
• Garage rent (43.2)
• Gasoline (43.2)
• Gasoline taxes (43.2)
• Gifts (20.25)
• Home office expenses (19.14)
• Hotel costs (20.5)
• Job-hunting costs (19.8)
• Labor union dues (19.6)
• Laundry (19.7)
• Legal expenses (19.18)
• Local transportation and travel away from home (20.1)
• Lodging (20.5)
• Magazines (19.6)
• Malpractice liability premiums (40.6)
• Meals (20.3, 20.4)
• Medical examinations (17.2)
• Membership dues and fees (19.6)
• Motel charges (20.5)
• Moving expenses (12.7)
• Parking fees (43.2)
• Passport fees for business travel (20.11)
• Pay turned over to employer (2.9)
• Periodicals (19.6)
• Protective clothing (19.7)
• Rail fares (20.5)
• Reimbursed expenses (20.30–20.34)
• Safety helmets (19.7)
• Safety shoes (19.7)
• Secretarial convention (20.12)
• Subscriptions (19.6)
• Taxi fares (20.5)
• Telephone calls (19.15)
• Toll charges (43.2)
• Tools (19.13)
• Trade association dues (19.6)
• Tuition (33.13)
• Typewriter (19.12)
• Uniforms (19.7)
• Union dues (19.6)
• Work clothes (19.7)

19.4 Job Expenses Not Subject to the 2% of AGI Floor

Expenses of teachers, instructors, counselors, principals, or aides. You may claim an “above-the-line” deduction (whether or not you itemize) of up to $250 for classroom supplies and equipment and professional development costs, as discussed in 12.2. Expenses not allowed as an above-the-line deduction must be claimed as miscellaneous itemized deductions subject to the 2% of AGI floor (19.3).

Impairment-related work expenses. Unreimbursed impairment-related work expenses are reported on Form 2106 (or Form 2106-EZ where eligible) and then the unreimbursed portion is entered on Line 28 of Schedule A as a miscellaneous itemized deduction that is not subject to the 2% of AGI floor; see 19.5. To qualify for the deduction, you have to show:

1. You are physically or mentally disabled. The physical or mental disability must result in a functional limitation of employment that substantially limits one or more major life activities. Generally, showing blindness or deafness will meet this test, but other disabilities that impair your ability to walk, speak, breathe, or perform manual tasks also may qualify if they limit the ability to work.
2. You incur the expenses in order to work. The expenses must be ordinary and necessary to allow you to work. Attendant care services at a place of employment that are necessary for you to work are also deductible.

Expenses of performing artists. As a performing artist with very low income, you may be able to claim job expenses as an above-the-line deduction from gross income, whether or not itemized deductions are claimed (12.2).

You report the performing artist expenses on Form 2106 (or Form 2106-EZ where eligible) and enter the total as an above-the-line deduction (allowed even if you do not itemize) on Line 24 of Form 1040, instead of on Schedule A. If you do not meet the tests, the expenses are deducted on Schedule A subject to the 2% of AGI floor.

Moving expenses. Moving expenses to a new job location (12.3), although job related, are claimed on Form 3903 and then deducted directly from gross income (above-the-line deduction) on Form 1040, Line 26, rather than being claimed as an itemized deduction on Schedule A.

19.5 Other Miscellaneous Expenses Not Subject to the 2% of AGI Floor

Certain expenses, shown below, are not subject to the 2% of AGI floor. They are claimed on Line 28 of Schedule A as “Other Miscellaneous Deductions.” These deductions are generally subject to the overall reduction to itemized deductions that applies to certain higher-income taxpayers, but exceptions apply for gambling losses and casualty/theft losses of income-producing property (13.7).

Miscellaneous expenses not subject to the 2% of AGI floor include:

• Casualty and theft losses of income-producing property(18.13)
• Impairment-related work expenses for disabled employees(19.4)
• Gambling losses up to the amount of gambling income(11.3)
• Estate tax attributable to income in respect of a decedent(11.16)
• Repayment of more than $3,000 that was previously included in income under a claim of right(2.8)
• Amortizable bond premium on bonds purchased before October 23, 1986(4.17)
• Unrecovered investments in pension on deceased retiree’s final return(7.25)

19.6 Dues and Subscriptions

You may deduct as miscellaneous itemized deductions, subject to the 2% of AGI floor on Schedule A (19.1), dues paid to a:

• Professional society if you are a salaried lawyer, accountant, teacher, physician, or other professional
• Trade association when conducted for the purpose of furthering the business interests of its members
• Stock exchange if you are a securities dealer
• Community “booster” club conducted to attract tourists and settlers to the locality where the members do business
• Chamber of Commerce if it is conducted to advance the business interests of its members

Union costs. Union members may deduct as “miscellaneous” itemized deductions union dues and initiation fees. Similarly, non-union employees may deduct monthly service charges to a union. An assessment paid for unemployment benefits is deductible if payment is required as a condition of remaining in the union and holding a union job. Voluntary payments to a union unemployment benefit or strike fund are not deductible.

No deduction is allowed for mandatory contributions to a union pension fund applied toward the purchase of a retirement annuity; the contributions are treated as the cost of the annuity. Furthermore, to the extent that an assessment covers sick, accident, or death benefits payable to you or your family, it is not deductible. Similarly, an assessment for a construction fund to build union recreation centers was disallowed by the Tax Court, even though the payment was required for keeping the job.

Campaign costs for running for union office are not deductible.

Subscriptions. Subject to the 2% of AGI floor, you may claim as miscellaneous itemized deductions unreimbursed payments for job-related subscriptions to professional journals and trade magazines.

19.7 Uniforms and Work Clothes

The unreimbursed cost of uniforms and other apparel, including their cleaning, laundering, and repair, is deductible as an employee job expenses only if the clothes are:

1. Required to keep your job, and
2. Not suitable for wear when not working. A deduction is not allowed if the clothes are suitable for everyday wear, even if you only wear them at work.

The deduction is claimed on Form 2106 (or Form 2106-EZ) and then entered on Line 21 of Schedule A, where it is subject to the 2% of AGI floor (19.1).

Special work clothes. Courts have held that the cost of special work clothes that protect you from injury is deductible even if you are not required to wear them to keep your job. This would include safety glasses, safety boots or shoes, hard hats and work gloves.

However, you may not deduct the cost of special clothing, such as aprons and overalls, that protect your regular street clothing. Nor may you deduct the cost of ordinary clothes used as work clothes on the grounds that: (1) they get harder use than customary garments receive; (2) they are soiled after a day’s work and cannot be worn socially; or (3) they were purchased for your convenience to save wear and tear on your better clothes. For example, a sanitation inspector, a machinist’s helper, a carpenter, and a telephone repairman were not allowed to deduct the cost of their work clothes.

Employer allowance. An allowance paid by your employer for work clothes or a uniform is not reported as income, unless you do not substantiate the expenses to your employer. If you do substantiate the expenses, those exceeding the reimbursement are reported on Form 2106, and the deduction is subject to the 2% of AGI floor (20.30).

High-fashion work clothes. That your job requires you to wear expensive clothing is not a basis for deducting the cost of the clothes if the clothing is suitable for wear off the job.

Deductions allowed. Deductions for costs of uniforms and work clothes have been allowed to:

• Airline pilot
• Bakery salesperson—for a uniform with a company label
• Baseball player
• Bus driver
• Cement finisher for gloves, overshoes, and rubber boots
• Civilian faculty members of a military school
• Commercial fisherman for protective clothing, such as oil cloths, gloves, and boots
• Dairy worker for rubber boots, white shirts, trousers, and cap worn only while inside the dairy
• Entertainer for theatrical clothing used solely for performances
• Exotic dancer for breast implants used as a “stage prop” essential to her business; see Example 7 in 19.9
• Factory foreman for white coat bearing the word “foreman” and the name of the company
• Factory worker for safety shoes
• Firefighter
• Hospital attendant for work clothes; he came in contact with patients having contagious diseases
• Jockey
• Letter carrier
• Meat cutter for special white shoes
• Musician for formal wear
• Paint machine operator for high top shoes and long leather gloves
• Plumber for special shoes and gloves
• Police officer
• Railroad conductor
• Railroad firefighter for boots, leather gloves, raincoat, caps, and work gloves

19.8 Expenses of Looking for a New Job

Subject to the 2% of AGI floor (19.1), you may deduct expenses of looking for a new job in the same line of work, whether or not a new job is found. If you are unemployed when seeking a new job, and the period of unemployment has been substantial, the IRS may disallow the deduction.

Expenses of seeking your first job are not deductible, even if a job is obtained. Also, expenses of looking for a job in a different line of work are not deductible, even if you get the job.

The IRS may also dispute the deduction of search expenses of a previously employed professional who forms a partnership.

Travel expenses. If you travel “away from home” (20.3) to find a new job in the same line of work, such as an interview in a distant city, you may deduct travel expenses, including meals and lodging. If, during the trip, you also do personal visiting, you may deduct the travel expenses to and from the area if the trip was primarily related to your job search. Time spent on personal activity is compared with time spent looking for a job to determine the primary purpose of the trip. If the travel expenses to and from the destination are not deductible because the trip was primarily personal, you may still deduct the expenses of seeking a new job in the same line of work while you are away.

Local transportation expenses (not away from home) incurred while looking for a new job in the same line of work are deductible. If you use your own car, the IRS standard mileage allowance (43.1) can be used to figure your driving costs.

Are you between jobs? If you are between jobs and you continue to see and entertain your former customers, the IRS holds that you may not deduct the cost of entertainment and other business expenses during this period on the ground that you are not in business and earning income. However, the Tax Court in the following case allowed the deduction.

19.9 Local Transportation Costs

Unreimbursed local transportation costs to see your employer’s clients or customers, such as taxi, bus, or train fares, are miscellaneous itemized deductions subject to the 2% of AGI floor(19.1). Transportation from your regular job to a second job on the same day is also deductible. You may not deduct the cost of commuting from home to a regular job or second job, but commuting to a temporary work location (20.2) is deductible.

If you use your own car for job-related travel, you may deduct unreimbursed out-of-pocket costs for gasoline, tolls, and parking. The IRS mileage allowance (43.1) is available for the occasional business use of your personal car if you elected the allowance for the first year you used the car for business purposes; see the instructions to Form 2106 or Form 2106-EZ.

19.10 Unusual Job Expenses

Taxpayers who claim deductions for unusual types of expenses should expect opposition from the IRS. However, deductions in the following cases were allowed.

19.11 Computer Bought for Job

Computers (and peripherals) are treated as “listed property” subject to deduction restrictions. To get a first-year expensing deduction (42.3) or to claim any type of depreciation for a computer you buy, the computer must be used for the convenience of your employer, which means your use of the computer satisfies a substantial business need of your employer. The computer must also be required as a condition of your job, which means that you cannot properly do your job without it. The IRS strictly interprets these requirements.

A letter from your employer stating that a computer is needed for your position does not by itself satisfy the deduction tests. Even where your employer encourages use of a personal computer that is used for basic job requirements, the IRS requires proof that you need your own computer to do your job because your employer does not provide one, or because the computer supplied by your employer is not adequate for your job. It is not enough that the computer helps you do your job; it must be required for you to properly do your job.

Claiming a deduction. If you buy a computer and can meet the “convenience of the employer” and “job condition” tests, and you have records to prove that you used the computer more than 50% of the time for your job, you may write off the cost on your return for the year of purchase using first-year expensing (42.3) or accelerated MACRS depreciation rates (42.5). If business use of the computer is 50% or less, you may not use first-year expensing, or accelerated MACRS but you may claim straight-line depreciation (42.9).

First-year expensing or depreciation is claimed on Form 4562 and then entered on Form 2106 or Form 2106-EZ along with other job-related costs. The deduction from Form 2106 or Form 2106-EZ is subject to the 2% of AGI floor for miscellaneous deductions on Schedule A (19.1). If you use first-year expensing, bonus depreciation, or accelerated MACRS and business use in a later year falls to 50% or less, the deductions are subject to recapture (42.10).

19.12 Cell Phones, Calculators, Copiers and Fax Machines

The listed property requirements applied to computers (19.11) do not apply to cell phones, calculators, copiers and fax machines. This means that the restrictive convenience of the employer and job condition rules do not apply. However, to depreciate (subject to the 2% of AGI floor) the cost of such equipment, you should be ready to prove that you need the equipment for your job, and keep a record of the time it is used for business. To claim first-year expensing (42.3), rather than regular depreciation, you must use the equipment more than 50% of the time for business.

19.13 Small Tools

If you furnished your own small tools used on your job, you may deduct their cost if they are not expected to last beyond a year. The deduction is subject to the 2% of AGI floor (19.1). The cost of tools with a useful life of more than a year must be recovered through depreciation or first-year expensing (42.3). Be prepared to substantiate your deduction with receipts showing the cost and type of tools purchased, and the business necessity for them.

19.14 Employee Home Office Deductions

The tax law has been drafted to prevent most employees from deducting the expenses of an office at a home. Even if an employee should meet one of the tests for deducting home office expenses (40.12), such as doing administrative work at home, the employee must also show that the home office was required for the “convenience of his or her employer” in order to claim the deduction. Telecommuters who are required to work at home satisfy the employer convenience test but if an employee requests telecommuting and the employer has on-premises office space available, the IRS is likely to argue, barring unusual facts, that the home office is for the employee’s convenience and not for the employer’s convenience. The IRS has not provided specific guidelines for telecommuters.

If the deduction tests can be met, the IRS’ optional safe harbor method (40.12) or the regular home office expense method may be used, but the allowable office expenses (other than mortgage interest and taxes) are subject to the 2% of AGI floor on Schedule A (19.1); see IRS Publication 587 for reporting instructions.

19.15 Telephone Costs

If you use your cell phone to make business calls outside of your employer’s office or at home, keep a record or diary of business calls to support your deduction. To avoid the problem of allocating the costs of a single phone between business and personal use, consider a separate phone for business use only.

If you have a home office meeting the deduction tests (19.13), and use a land line, you may not claim as a deductible home office expense any part of the standard monthly charge for the first telephone line into your home. This disallowance rule only applies to the first telephone line. If you have more than one telephone line and use additional lines in a home office, costs for these lines remain deductible, along with long-distance calls, phone rentals, or optional services such as call waiting, call forwarding, three-way calling, or extra directory listings, subject to the regular home office limitations (19.13).

19.16 Checklist of Deductible Investment Expenses

The following investment expenses are deductible as miscellaneous expenses on Schedule A subject to the 2% of adjusted gross income (AGI) floor (19.1).

• Accounting fees for keeping records of investment income.
• Bank deposit loss if not federally insured (18.5).
• Casualty or theft losses of income-producing property such as stock certificates, but not rental or royalty property; the deduction is figured on Form 4684 (18.13) and entered on Schedule A.
• Fees for collecting interest and dividends. Also deductible are fees paid to a bank that acts as dividend agent in an automatic dividend reinvestment plan of a publicly owned corporation. Costs of collecting tax-exempt interest are not deductible; expenses deducted on an estate tax return are also not deductible. Fees paid to a broker to acquire securities are not deductible but are added to the cost of the securities. Commissions and fees paid by an investor on the sale of securities reduce the selling price; a dealer, however, may deduct selling commissions as business expenses.
• Fees to set up or administer an IRA. The fees must be billed and paid separately from the regular IRA contribution.
• Guardian fees or fees of committee for a ward or minor incurred in producing or collecting income belonging to the ward or minor or in managing income-producing property of the ward or minor.
• Investment management or investment planner’s fees. However, fees allocated to advice dealing with tax-exempt obligations are not deductible.
• Investment fees from non–publicly offered mutual fund, shown in Box 5 of Form 1099-DIV.
• Legal costs (19.18).
• Premiums and expenses on indemnity bonds for the replacement of missing securities. If part of the expenses are refunded in the year the expenses are paid, only the excess expense is deductible. A refund in a later year is taxable income to the extent the expenses were deducted and reduced your tax (11.6).
• Proxy fight expenses where the dispute involves legitimate corporate policy issues, not a frivolous desire to gain membership on the board.
• Safe-deposit box rental fee or home safe to hold your securities, unless used to hold personal effects or tax-exempt securities.
• Salary of a secretary, bookkeeper, or other employee hired to keep track of your investment income.
• Subscriptions to investment services.

Computer used to manage investments. Subject to the 2% floor, depreciation may be claimed (42.10).

Managing investment property. Expenses incurred in managing property held for income are deductible, even if the property does not currently produce income. Expenses incurred to maintain or conserve the property are also deductible.

Rental or royalty expenses. Expenses of earning royalty or rental income are deducted directly from the income, rather than as itemized deductions subject to the 2% of AGI floor.

Nondeductible travel costs. Investors may not deduct the costs of these types of trips:

• Trips to investigate prospective rental property.
• Trips to attend a convention, seminar, or similar meeting that deals with investment, financial planning, or the production or collection of income. Convention costs are deductible only in the case of a business activity (20.12).
• Trips to attend stockholder meetings. However, in a private letter ruling, one stockholder was allowed a deduction. He owned substantial stockholdings that had lost value because his corporation had been issuing stock to the public at prices below book value. He went to the annual shareholders’ meeting to present a resolution requesting management to stop the practice; the resolution passed. Under such circumstances, the IRS held that the trip was directly related to his stockholdings and allowed him the deduction. The IRS distinguished his case from a ruling that bars most stockholders from deducting the cost of travel to an annual meeting. Here the stockholder’s purpose in getting the resolution passed was more closely related to his investment activities than if he had attended the meeting, as most stockholders do, to pick up data for future investment moves.

Hobby expenses. Deductions for hobby expenses are subject to limitations (40.10).

Home office of an investor. An investor may not deduct the costs of an office at home unless investing constitutes a business. For example, you get no deduction for use of a home office in your residence where you manage your investments and read financial periodicals and reports. These activities are not considered a business.

19.17 Costs of Tax Return Preparation and Audits

You may deduct on Schedule A your payment of fees charged for the services listed below, subject to the 2% of AGI floor (19.1).

• Preparing your tax return or refund claim involving any tax;
• Preparing and obtaining a private IRS ruling, including IRS filing fees; and
• Representing you before any examination, trial, or other type of hearing involving any tax.

Tax preparation fees include the cost of tax publications and tax preparation software programs. Deductible tax preparation expenses also include fees paid to electronically file your return. The term “any tax” covers not only income taxes but also gift, property, estate, or any other tax, whether the taxing authority be federal, state, or municipal.

Tax practitioner’s fees. Deductible fees for services of tax practitioners are claimed on Schedule A as miscellaneous itemized deductions (subject to the 2% of AGI floor) on the tax return for the year in which the fee was paid. For example, if in March 2017 you paid an accountant to prepare your 2016 return, the fee is deductible on your 2017 return.

You deduct fees related to preparing Schedule C or F (and related business Schedules) on the Schedule C or F, thereby avoiding the 2% of AGI floor on Schedule A.

If you report rental or royalty income or loss on Schedule E, you deduct the allocated tax preparation fee on Schedule E.

An accountant’s fee for arranging the purchase of real estate was deductible where the purchase was part of a plan to cut taxes; see the Collins Example below.

Personal checking account fees. These are nondeductible, even though the checks are used for tax records. Similarly, the per-check fee on an interest-bearing NOW account is nondeductible. However, fees charged on a bank money-market account may be deductible if check writing is severely limited and writing excess checks forfeits the status of the account as a money-market account.

Appraisal fees. Appraisals for determining a casualty loss or charitable donation are miscellaneous expenses.

19.18 Deducting Legal Costs

A legal expense is generally deductible if the dispute or issue arose in the course of your business or employment or involves income-producing property. Legal expenses for personal lawsuits are not deductible unless you recover taxable damages. Legal fees incurred in obtaining an award of tax-free damages, such as for physical injuries (11.7), are not deductible.

If you are self-employed, your deduction for legal fees arising from a business-related dispute is claimed on Schedule C (40.6). Legal expenses related to your job as an employee or to investment activities are claimed as miscellaneous itemized deductions subject to the 2% of AGI floor (19.1), except for fees relating to employment discrimination claims, which may qualify for an above-the-line deduction (19.19). The IRS may disallow the deduction on the ground that the legal dispute does not directly arise from the business or income activity. Thus, for example, the cost of contesting the suspension of a driver’s license for drunken driving is not deductible despite a business need for the license; the suspension arose out of a personal rather than a business-related activity. A deduction may also be disallowed where the dispute involves title to property.

Legal fees incurred in organizing a new business may be deductible (40.11).

Employment suits. The following Examples illustrate how the IRS and the courts have dealt with claims that job-related legal costs are deductible.

Will contests and wrongful death actions. Legal costs of a will contest are generally not deductible because an inheritance is not taxable income. Similarly, legal fees incurred to collect a wrongful death award (which is tax-free income) are not deductible.

Title issues or disputes. Legal costs related to the acquisition of property or to the determination of title to property, whether such property is business or personal, are nondeductible capital expenditures. They are added to the basis of the property. For example, litigation costs to fix the value of shares of dissident shareholders are not deductible because they are related to the purchase of the stock and are part of the cost of acquisition.

Legal fees incurred to acquire title to stock are also nondeductible.

Where a dispute over property does not involve title, such as in a recovery of income-producing securities loaned as collateral, the Tax Court holds that legal fees are deductible.

Personal injury actions. Where you recover taxable damages, the legal fees (19.19) are deductible above the line (from gross income) in unlawful discrimination cases or as a miscellaneous itemized deduction subject to the 2% floor in other cases (11.7). If the damages are not taxable, legal fees are not deductible (11.7).

Legal expenses incurred in marital actions. If you are receiving taxable alimony, you may deduct the portion of the legal fees paid for arranging the alimony payments, but not the fees allocable to arranging the rest of the divorce or separation agreement; and if you are paying deductible alimony, you may only deduct the portion of your fees specifically allocated to tax advice(37.8).

Collecting Social Security. If you hire an attorney to press a claim for disputed benefits, such as disability benefits, you may deduct the legal fees only to the extent that your benefits are taxable (34.3). For example, if 50% of your Social Security benefits are taxable, 50% of your legal fees are treated as miscellaneous expenses subject to the 2% of AGI floor.

Estate tax planning fee. All or part of an attorney’s fee for estate tax planning services may be deductible subject to the 2% of AGI floor. Estate tax planning usually involves tax and non-tax matters. To the extent that the services do not cover tax advice or income-producing property, the fee is not deductible. A bill allocating a fee between deductible and nondeductible services may help support a deduction claimed for the deductible portion of the fee.

Recovery of attorneys’ fees from government. If you “substantially prevail” in a tax dispute with the IRS, you may be able to recover attorneys’ fees paid in administrative or court proceedings (48.11).

19.19 Contingent Fees Paid Out of Taxable Awards

If you recover taxable damages in a lawsuit or settlement and part of the award goes directly to your attorney as a contingent fee, the fee is includible in your income under a Supreme Court decision (11.7). An offsetting deduction for the fees may be available. An above-the-line deduction (directly from gross income) is allowed for attorneys’ fees and court costs in employment discrimination suits, certain other unlawful discrimination actions, and Federal False Claims Act cases. The deduction, claimed on Line 36 of Form 1040 (12.2), is limited to the amount of the judgment or settlement reported as taxable income for the year.

If the above-the-line deduction does not apply, fees for recovering taxable personal damages or job-related damages (19.18) are allowed only as a miscellaneous itemized deduction subject to the 2% of AGI floor (19.1). If the alternative minimum tax (AMT) applies, fees claimed as a miscellaneous itemized deduction for regular tax purposes must be added back to income in calculating AMT (23.2), so the benefit of the deduction is lost.

Fees incurred in recovering lost business income (19.18) are deductible on Schedule C.