Miscellaneous and Job-Related Deductions
Starting in 2018, until 2025, under the new tax package passed by the Republicans at the end of 2017, known as the Tax Cuts and Jobs Act, , employees will no longer be able to deduct unreimbursed business expenses like a home office or the business use of a car, so it would behoove employees to seek reimbursements under an accountable plan. Additionally, all deductions subject to the 2% of AGI floor, such as tax preparation fees, and the cost of tax books or software, will no longer be deductible as a miscellaneous itemized deduction. However, any fee charged specifically for preparing the following tax schedules will still be deductible:
Historical Note: Miscellaneous and Job-Related Deductions before 2018
Miscellaneous and job-related deductions allow taxpayers to deduct many expenses relating to job searches, employee expenses, and investment expenses. However, most of these deductions must be itemized and are limited to that amount that exceeds 2% of the adjusted gross income (AGI) of the taxpayer — commonly called the 2% AGI floor. Adjusted gross income is gross income minus certain adjustments, such as retirement contributions and deductible alimony.
If a miscellaneous expense is subject to the 2% AGI floor, then all such expenses must exceed 2% of the taxpayer's adjusted gross income, and only that portion is deductible. Furthermore, any deductions subject to the 2% floor must be added back to calculate the alternative minimum tax liability. If the taxpayer is subject to the AMT tax, then the miscellaneous deductions cannot be used.
All deductions subject to the 2% of AGI floor will no longer be deductible from 2018 to 2025, because of the Tax Cuts and Jobs Act passed by the Republicans at the end of 2017. However, miscellaneous deductions not subject to the 2% of AGI floor, such as gambling losses or amortizable bond premiums, will still be deductible under current rules.
So, for instance, suppose you incurred the following expenses:
- work clothes expense, $200;
- job-search costs, $500.
- If you earned $20,000 for the year, then 2% of your AGI will equal $400. Therefore, only $700 – $400 = $300 will be deductible, and only if your total itemized deductions are greater than your standard deduction.
Most of the miscellaneous expenses subject to the 2% AGI floor are those that can be claimed by jobseekers, employees, or investors, or they are personal expenses that would otherwise not be deductible, and includes such things as:
- tax-preparation items
- tax advice and preparation fees
- appraisal fees for casualty losses and charitable contributions
- convenience fees charged for using a credit card to pay taxes
- other expenses incurred for the determination, collection, or refund of any tax
- unreimbursed employee business expenses
- unreimbursed travel, meals, entertainment expenses
- employee home-office expenses
- unreimbursed local transportation costs
- professional, business association, and union fees and dues
- cost of uniforms and work clothes, including the cost of their cleaning, laundry, and repair
- cost of job searches and job agency fees
- depreciation of a computer required by the employer
- small tools
- electronic gadgets, such as mobile phones and tablets, and any associated telecommunication expenses
- subscriptions to professional journals
- work-related educational costs
- expenses incurred by investments or the production of taxable income
- investment costs, including IRA custodial fees, investment advice, investment counselor fees, and safe-deposit rentals
- loss from liquidating in traditional or Roth IRA
- share of investment expenses from a partnership, limited liability company or S corporation
- fees to collect interest and dividends
- office related expenses for managing investments, including clerical help
- depreciation of computers or other electronics used to manage investments
- hobby expenses (which was always limited by hobby income)
- damages paid for breaching an employment contract
- any other expenses related to investments or the production of taxable income
Travel costs that are generally not deductible include trips to investigate rental property and trips to conventions, seminars, or other types of meetings, including trips to attend stockholders meetings. These items are generally not deductible because they are not directly involved in producing income. Commuting to and from work is never deductible. Unless the taxpayer is a professional trader, an investor cannot deduct the cost of a home office. The cost of traveling to investigate income-producing property or to confer with an attorney, accountant, trustee, or investment counselor about income is deductible but subject to the 2% AGI floor.
The cost of uniforms and work clothes, including the cost for cleaning, laundering, and repairing the clothes, are deductible if they are not suitable to wear elsewhere. However, if the clothes are suitable for wearing off the job, then they are not deductible, even if they are required for the job. So, for instance, television newscasters cannot deduct the cost of their clothing, since they can wear those clothes anywhere.
Expenses incurred in looking for a new job in the same line of work as the taxpayer's previous job is deductible, including travel costs and other related expenses to go to job interviews and employment agency fees. On the other hand, expenses incurred looking for a first job are not deductible.
Computers purchased for work are deductible if it is for the convenience of the employer, and the employer requires it. The work done on the computer must be inextricably linked to the job. Depreciation claimed for computers used to manage investments are also subject to the 2% floor. However, computers used for work or investments are considered listed property, meaning that their deductibility is proportional to the amount of time spent using it for the deductible purpose divided by the total amount of time that the computer is used.
Cell phones are also deductible. Previous to 2010, cell phones were classified as listed property. However, the Small Business Jobs Act of 2010 removed cell phones from this list and the strict requirements for documenting the use of listed property. If the cell phone is used more than 50% of the time for the business, then the taxpayer can claim accelerated depreciation, including first-year expensing; otherwise, straight-line depreciation must be used. Recapture rules may apply if the cell phone was first used more than 50% of the time for business, but dropped below that in later years. The cost of a landline telephone is not deductible except for business long-distance calls. A 2nd landline, however, is deductible, if used exclusively for business.
Generally, the cost of preparing tax returns and audits is subject to the 2% AGI floor. Most of the fees that are deductible must be directly related to preparing a tax return or for help over a specific tax controversy. Fees for general tax advice are not deductible unless they relate to a business or the management of income-producing property. Tax books are also deductible. If the taxpayer pays his taxes with a credit card and the company charges a convenience fee, then the fee is deductible subject to the 2% floor.
Moreover, some expenses are subject to special rules, including the following:
- business meals and entertainment
- business use of the home, and
- tools and equipment that require depreciation
Miscellaneous expenses not subject to 2% AGI floor, and that will still be deductible under the new Republican tax plan that applies from 2018 to 2025, include:
- impairment related work expenses for disabled employees
- gambling losses that do not exceed gambling income
- estate tax attributable to income in respect of the decedent
- casualty and theft losses affecting income-producing property
- the expenses of a performing artist
The taxpayer must file Schedule A, Itemized Deductions to claim miscellaneous and job-related expenses. To claim deductions for employee expenses, the taxpayer must file Form 2106, Employee Business Expenses. Form 2106-EZ, Unreimbursed Employee Business Expenses may be used if the employee had no unreimbursed expenses and vehicle costs are claimed using the standard mileage rate. Depreciation is figured on Form 4562, Depreciation and Amortization.
Tax Tip: Reimbursement for Expenses Saves on Both Employment Tax and Ordinary Income Tax
Rather than paying employee expenses and claiming the meager deduction that the law allows, and that will no longer be deductible from 2018 to 2025, much more tax can be saved if your employer reimburses you for your expenses, even if you take a reduction in pay equal to the amount of the expenses, since neither employment taxes nor income taxes are assessed on the reimbursement. For instance, if you are in the 15% tax bracket, with an AGI of $50,000, and you have $1000 in expenses, you would avoid $76.50 in payroll taxes and another $150 in marginal taxes by having the expense reimbursed, for a total savings of $226.50. On the other hand, writing the expense off as a miscellaneous deduction would not save anything, because the $1000 would equal 2% of your AGI.
If, instead, you had $2000 of expenses, then deducting the expenses as a miscellaneous deduction would only reduce your income by ($2000 – 2% × AGI) × 15% = $1000 × 15% = $150. The $150 reduction in income would result in an actual tax savings of $150 × 15% = $22.50. Compare that to the $453 that would be saved in employment and ordinary tax if the expenses were reimbursed. Moreover, the $453 would be saved even if you did not itemize, and since most people who make $50,000 per year do not itemize, there wouldn't be no tax savings at all in claiming a deduction.
Note that if the employer reduces your wages by the amount of the expenses to pay for the reimbursement, than even the employer can save the employer's portion of the payroll tax, equal to 7.65%, by paying the amount as a reimbursement rather than as a wage, so the employer would save $76.50 for every $1000 paid as a reimbursement for expenses rather than as a wage. This could be an effective argument to convince your employer to pay your expenses as a reimbursement in exchange for a lower wage reduced by average expenses.