| Where should an individual taxpayer deduct tax | | | | fees deducted on Schedule E do not save the |
| preparation fees? The obvious answer might be on | | | | taxpayer any self-employment tax because the rental |
| Schedule A of Form 1040 as a miscellaneous | | | | and/or royalty income reported on Schedule E is not |
| deduction. Are tax preparation fees deductible only on | | | | subject to self-employment tax. |
| Schedule A for all taxpayers? Thankfully, the answer | | | | A taxpayer may not deduct all of the tax preparation |
| is no. | | | | fees on Schedules C, E, and F of Form 1040. The tax |
| Deducting tax preparation fees on Schedule A will | | | | preparer should provide a statement to the taxpayer |
| provide little or no benefit for most taxpayers because | | | | that indicates how much of the tax preparation fee |
| the total miscellaneous deductions must exceed two | | | | was related to the taxpayer's business, farm, and/or |
| percent of the taxpayer's adjusted gross income to | | | | rental and/or royalty income. The taxpayer may |
| provide any benefit. In addition, the taxpayer's total | | | | deduct the remainder of the tax preparation fee only |
| itemized deductions must usually exceed the standard | | | | on Schedule A. |
| deduction amount to provide any tax benefit. | | | | If the tax preparer does not provide the taxpayer with |
| The IRS ruled in Rev. Rul. 92-29 that taxpayers may | | | | a detailed statement showing how much of the tax |
| deduct tax preparation fees related to a business, a | | | | preparation fee was for the taxpayer's business, farm, |
| farm, or rental and royalty income on the schedules | | | | and/or rental and/or royalty income, the taxpayer |
| where the taxpayer reports such income. | | | | shoud ask the tax preparer for an itemized statement. |
| A taxpayer who is self-employed may deduct the | | | | If the tax preparer will not provide an itemized |
| portion of the tax preparation fees related to the | | | | statement, the taxpayer should use a reasonable |
| business, including schedules such as depreciation | | | | allocation. In that case, the taxpayer should seriously |
| schedules, on Schedule C of Form 1040 as a business | | | | consider using a different tax preparer next year. |
| expense. The tax preparation fees deducted on | | | | Here is an example. Assume that the taxpayer is |
| Schedule C save the taxpayer income tax and | | | | self-employed and also owns rental real estate. The |
| self-employment tax. | | | | tax preparation fee for the taxpayer's Form 1040 and |
| A taxpayer who is self-employed as a farmer would | | | | related schedules for 2005 was $600. The tax |
| deduct the portion of the tax preparation fees related | | | | preparer states that of the $600 total fee, $300 was |
| to the farm on Schedule F of Form 1040. The tax | | | | related to the taxpayer's business, $200 was related |
| preparation fees deducted on Schedule F save the | | | | to the rental real estate, and the remainng $100 was |
| taxpayer income tax and self-employment tax. | | | | related to other parts of the taxpayer's income tax |
| A taxpayer who has rental and/or royalty income | | | | return. The taxpayer paid the $600 in February 2006. |
| reported on Schedule E of Form 1040 would deduct | | | | On the taxpayer's income tax return for 2006, the |
| the portion of the tax preparation fees related to the | | | | taxpayer may deduct the $600 tax preparation fee as |
| rental and/or royalty income on Schedule E. The tax | | | | follows: $300 on Schedule C, $200 on Schedule E, and |
| preparation fees deducted on Schedule E save the | | | | $100 on Schedule A as a miscellaneous deduction. |
| taxpayer income tax. However, the tax preparation | | | | |