What is the 2% rule?
In taxes, the 2% rule refers to the limitation on certain types of miscellaneous deductions, including unreimbursed job-related expenses (Form 2106), tax preparation fees, investment or advisory fees, and safe deposit box rentals.
Under the 2% rule, you're only allowed to deduct the portion of miscellaneous expenses that exceeds 2% of your adjusted gross income (AGI). You must also itemize to get this deduction.
You paid $800 in job-related tools and uniforms, plus another $200 to prepare last year's taxes, so you have $1,000 in deductions subject to the 2% rule.
If your AGI is $35,000 and you're itemizing, you can deduct $300 because:
- $35,000 × 0.02 = $700 and $1000 - $700 = $300
But if your AGI is $50,000 or higher, you can’t deduct these expenses because:
- $50,000 × 0.02 = $1,000 and $1,000 – $1,000 = $0
So the higher your AGI is, the higher your expenses need to be in order for you to be able to deduct a portion of them.
When you enter expenses subject to the 2% rule, we'll automatically check to see if you qualify to take the deduction. If your expenses qualify, the deduction will show up on line 27 of Schedule A.