Tax preparation fees can really add up. This is especially true if you're paying the quarterly self-employment tax. Are these tax preparation fees deductible? Read on to learn about how deducting tax preparation expenses can help offset these common fees.
What Are Tax Preparation Fees?
Tax prep fees are expenses incurred to prepare tax schedules. These can include:
- profits or losses from businesses
- rentals or royalties or farm income
- other expenses.
You can pay tax prep fees to a tax pro or for tax prep software. The goal of these fees is to help individuals claim more deductions and credits than they would otherwise find by preparing their taxes manually without assistance.
Despite their value proposition, tax preparation fees are not exactly a drop in the bucket. According to a survey by the National Association of Accountants, the average cost of tax preparation for returns filed in 2015 was $273 - a 4.6 percent increase from the previous year. This is where deducting tax preparation expenses can prove handy, especially for a still-fledgling business.
When Are Tax Preparation Fees Deductible?
The IRS generally allows you to deduct tax preparation fees on your return for the year in which you paid them. For example, on your 2015 return, you may deduct fees paid in 2015 for preparing your 2014 return. These fees aren't limited to the cost of tax preparation software programs or publications, either. They also extend to any fees you may have paid for e-filing your tax return.
How you report your tax preparation fees to the IRS in order to claim a deduction depends upon the relevant tax schedule that you incurred the tax preparation fees to complete. Whether your profits or losses are from business (Schedule C or Schedule C-EZ), rentals or royalties (Schedule E) or farm income or expenses (Schedule F), the IRS advises that you may deduct the tax preparation expenses incurred on the relevant tax schedule. The expenses of preparing the remainder of the return can be deducted on Schedule A (Form 1040) or Form 1040NR, Schedule A.
However, there is a catch to the tax preparation fee deduction. This deduction is subject to what is known as the 2 percent limit. This limit means that you can only claim the amount of the expenses that is greater than 2 percent of your adjusted gross income. Your adjusted gross income can be found on Form 1040, line 38 or Form 1040NR, line 37.
Can W2 Employees Deduct Tax-Prep Fees?
No, the tax reform bill removed this deduction for W2 taxpayers.
