Before tax reform, employees could potentially write off work-related expenses that were not reimbursed by their employer. Those deductions have been chopped along with several other “miscellaneous itemized deductions” as Congress attempts to simplify your tax reporting. The main argument is that fewer deductions are needed since the standard deduction that the IRS gives you nearly doubles to $12,000 for single filers and $24,000 for married couples.
If you are one of the folks who benefited from the old tax laws, you need to know about the impact of tax reform. Under prior law as an employee, you were able to deduct job-related expenses as a miscellaneous itemized deductions to the extent the expenses exceeded 2 percent of your adjusted gross income. For 2018 through 2025, the following expenses are no longer allowed as itemized deductions.
SUSPENDED EMPLOYEE WORK-RELATED DEDUCTIONS
The list of newly disallowed expenses is lengthy, but the ones that most likely to matter to you are expenses related to employment, including:
• Education expenses related to your work
• Travel expenses
• Tools and supplies used in your work as an employee
• Union dues
• Professional society dues
• Professional license fees
• Subscriptions to professional journals and trade publications
• Home office used regularly and exclusively for the convenience of your employer
• Work clothes and uniforms required for your job and not suitable for everyday use
• Legal fees related to your employment
• Job search expenses to seek new employment in your current profession
It’s important to note that the elimination of unreimbursed work-related expenses only affects those who claim employee-related deductions as an itemized deduction on Schedule A. If you are a business owner and file a Schedule C, your business-related deductions are not affected.
AXED DEDUCTIONS RELATED TO INVESTMENTS AND PRODUCTION OF INCOME
Other notable itemized deductions suspended until 2025 include:
• Investment advisory fees and expenses
• Tax preparation expenses
• Safe deposit box rental fees
• Hobby expenses (limited to hobby income)
• Loss on liquidation of traditional IRA or Roth IRA
ACCOUNTABLE PLAN SOLUTION
Since you can no longer deduct employment-related expenses, try negotiating with your employer to cover them through tax-free reimbursements under an “accountable plan.”
An accountable plan is your best option. It allows your employer to reimburse you for job-related expenses without having to include the reimbursements in your W-2. All you have to do is timely submit an expense reimbursement report with substantiation for your work-related expenses such as travel, meals, mileage, cell phone, internet and home-office use. The employer deducts the expenses and the reimbursements to you are tax-free. Accountable plans are a win-win for both employers and employees.
PER DIEM REMEDY
Your employer may also use the per diem method for reimbursing your out-of-town expenses for lodging, meals and incidentals. The per diem payments are tax-free as long as an expense report is submitted to the employer and payments are not more than the federal per diem rate.
If your employer does not want the perceived hassle of reviewing receipts, they may be willing to pay you a flat allowance or give you a raise to make up for the loss of your work-related deductions. It’s not as ideal as the accountable plan or the per diem method since the allowance or raise will be included in your W-2. When you are reimbursed with a flat allowance and you are not required to provide an expense breakdown, the allowance is taxable.
THE BOTTOM LINE
If you’re an employee who pays a significant amount out of pocket for job-related expenses, review your situation with a knowledgeable CPA to determine how you may be affected and your best course of action.
Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at firstname.lastname@example.org or 661-324-4971.