Did you purchase goods or services to aid the business that you worked for during the year? If so, did your employer reimburse you for this out-of-pocket expense? If not, you may be eligible to deduct these costs (hereinafter referred to as Unreimbursed Employee Expenses) as an itemized deduction on your income tax return. Read on to find out how…
Figuring out whether or not you are eligible to deduct your unreimbursed employee expenses is a three (3) step process, as follows (Note: you must satisfy all three conditions to qualify for deduction):
- You itemize deductions (as opposed to taking the standard deduction) on your return,
- You incurred eligible costs (as defined later), AND
- The aggregate total of all unreimbursed employee expenses is greater than 2% of your Adjusted Gross Income (AGI – line 38 of Form 1040).
Determining Eligibility of Unreimbursed Employee Expenses
The IRS restricts deductible, job-related costs to those items that are (again, must satisfy all criteria):
- Paid or incurred during your tax year,
- For carrying on your business of being an employee, AND
- Ordinary and necessary
The IRS defines an expense as ordinary if it common and accepted in your business, industry, or profession. In addition, they define an expense as necessary if it is appropriate and helpful to your business. Note: An expense does not have to be required to be considered necessary.
Tax Planning Opportunity
When it comes to business expenses, employees may want to consider asking their employer for reimbursement. If you can provide adequate documentation to substantiate your expenses and your employer reimburses you under an accountable plan, then that reimbursement is tax-free to you and tax-deductible to your employer. If you take the deduction, by comparison, only part of your job-related expenses will be deductible (at least 2% worth of you AGI will not be deductible).
Reporting Unreimbursed Employee Business Expenses
In addition to reporting unreimbursed employee business expenses on Schedule A of your income tax return, these costs must be reported on Form 2106, Employee Business Expenses, if any of the following applies to you:
- You are claiming job-related vehicle, travel, transportation, meal, or entertainment epenses,
- You are a qualified performing artists claiming performing-artist-related expenses,
- You are a fee-basis state or local government official claiming expenses in performing that job,
- You have travel expenses as a member of the Armed Forces reserves that you can deduct as an adjustment to gross income, or
- You are an individual with a disability and are claiming impairment-related work expenses.
Common Costs Identified as Unreimbursed Employee Expenses by IRS
Due to the wide variety of costs that you may have incurred related to your job, it is impossible to compile a comprehensive list of potentially deductible expenses.
The IRS does, however, list the following items as unreimbursed employee expenses (see Publication 529 for a complete list along with descriptions):
- Business liability insurance premiums,
- Depreciation from a computer required by your employer,
- Dues to a chamber of commerce if membership helps you do your job,
- Dues to professional societies,
- Educator expenses,
- Home office (or part of your home used regularly and exclusively for work),
- Job search expenses in your present occupation,
- Laboratory breakage fees,
- Legal fees related to your job,
- Licenses and regulatory fees,
- Malpractice insurance premiums,
- Medical examinations required by an employer,
- Occupational taxes,
- Subscriptions to professional journals and trade magazines related to your work,
- Tools & supplies used in your work,
- Travel, transportation, meals, entertainment, gifts, and local lodging related to your work,
- Union dues and expenses,
- Work clothes and uniforms if required and not suitable for everyday use, &
- Work-related education.