But did you know that the deduction is not limited to the fee?
Let’s begin with the basics.
Tax preparation costs are deductible as a “nontrade or nonbusiness” expense under Internal Revenue Code Section 1.212-1(l) –
“Expenses paid or incurred by an individual in connection with the determination, collection, or refund of any tax, whether the taxing authority be Federal, State, or municipal, and whether the tax be income, estate, gift, property, or any other tax, are deductible. Thus, expenses paid or incurred by a taxpayer for tax counsel or expenses paid or incurred in connection with the preparation of his tax returns or in connection with any proceedings involved in determining the extent of his tax liability or in contesting his tax liability are deductible.”
Generally tax preparation costs are deductible as a miscellaneous expense on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) exclusion. Because of this most taxpayers do not receive a tax benefit for tax preparation fees. In the “good old days” before exclusions and phase-outs were all the rage we would tell clients that, if they could itemize, our fee for preparing their tax returns were fully tax deductible – and they would be “reimbursed” by “Uncle Sam” for up to half of the fee (the top federal bracket used to be 50%)!
However IRS Revenue Ruling 92-29 states that taxpayers can allocate tax preparation costs and deduct costs related to a self-employed business on Schedule C, related to a farm operation on Schedule F, and related rental and royalty income on Schedule E.
Tax preparers will know how their fee was determined and can provide a statement to the taxpayer that indicates how much of the tax preparation fee was related to the taxpayer's business, farm, and/or rental and/or royalty income.
A taxpayer who reports rental income on his 2008 Schedule E can deduct, for example, $50.00 of a $150.00 tax preparation fee paid in March 2009 – the cost of calculating depreciation and preparing the 2008 Schedule E – on the 2009 Schedule E and the remaining $100.00 on the 2009 Schedule A.
There is a definite benefit to being able to allocate tax preparation costs. The obvious one is that you get a full deduction for the allocated portion. And, because a Schedule C, E or F deduction will reduce your AGI, you may also increase a multitude of deductions and credits that are affected by AGI. If you are taxed on your Social Security benefits you reduce your AGI by the equivalent of up to 185% of the actual allocated fee. In the case of a profitable Schedule C you will also reduce the self-employment tax liability.
IRS Publication 529 (Miscellaneous Deductions) states that deductible tax preparation fees “include the cost of tax preparation software programs and tax publications. They also include any fee you paid for electronic filing of your return.”
So if you are foolhardy enough to attempt to use a “box” to prepare your tax return you can deduct the cost of the TurboTax or other software package, plus any service fee related to electronically filing a self-prepared return.
If you choose to pay your income tax liability via credit card the processing company will charge you a “convenience fee” of usually about 2.5% of the payment. Initially, as per SCA 200115032 (SCA = Service Center Advice Document), the IRS held that “convenience fees paid by taxpayers in connection with the electronic payment of tax liabilities were not deductible” because these fees were “not related to or necessary to the determination of a tax liability”.
However an Office of Chief Counsel Memorandum issued on January 5, 2009 (PMTA 2009-002) concludes that “a taxpayer may deduct the convenience fee charged for paying individual income taxes with a credit or debit card, as an ordinary and necessary expense under Section 212(3) of the Internal Revenue Code.” The Chief Counsel further concluded “the credit and debit card convenience fees charged for paying individual income tax electronically are expenses paid in connection with the collection of tax.”
The Chief Counsel Memorandum begins with the caveat – “This Chief Counsel Advice responds to your request for assistance. This advice may not be used or cited as precedent.” However it does provide guidance on the current IRS thinking on an issue.
Under “expenses paid or incurred in connection with the preparation of his tax returns” you are also allowed to deduct auxiliary expenses connected with the preparation and submission of your return.
There was, I believe, a Tax Court decision that concluded a taxpayer could deduct round-trip mileage to consult with his tax preparer as well as postage expenses and photocopying expenses related to the preparation and submission of the return. I remember specifically posting about this decision, but a “google” search of the net, and a search of my blog posts at current host “blogger.com”, could not find the reference. Perhaps the post I wrote on the decision was during my tenure at “tripod.com”. Can anyone out there provide me with the specific reference?
When I had an office open to the public many clients would drive from their home in South Jersey to my Jersey City location. A round-trip could be 150 to as much as 200 miles. They could deduct the standard mileage allowance for business travel for these 150 to 200 miles as a tax preparation cost, which could add over $100.00 to the deduction!
Currently about 2/3 of the returns I prepare are mailed to me at my “mail drop”. In most cases the tax “stuff” is sent via Priority Mail. These clients can include the $5.00 Priority Mail fee in their deduction for tax preparation.
In addition, as an expense of the “collection” of federal income tax, it appears that a taxpayer can also deduct the cost of postage to mail the finished return to the IRS, or to their state tax authority.
We saw above that IRS Pub 529 says you can deduct the cost of “tax publications”. This includes newsletters (online and print), books and special reports on tax related topics. If you purchase any of my tax-related special reports the cost is deductible.
So, if you didn’t know that the tax deduction for tax preparation costs is not limited to the fee you pay to a tax pro for preparing your return, you do now!