If you typically deduct unreimbursed job expenses as an employee, get prepared for a change this tax season. All unreimbursed job expenses for traditional employees are no longer tax deductible. Here’s a breakdown of how that tax reform change may impact your 2018 return.
What changed about deducting unreimbursed job expenses?
Tax reform eliminated the option to claim “miscellaneous expenses subject to the 2 percent adjusted gross income (AGI) floor” as itemized deductions. Unreimbursed job expenses were previously part of that miscellaneous expense category. That means as a traditional employee, you can no longer deduct those costs on your tax return. And that includes the cost of:
- meals and entertainment
- office supplies
- vehicles (actual expenses or the standard mileage rate)
Don’t fret if you’re self-employed or a small business owner! You can still deduct those costs as business expenses. That includes sole proprietorships, farms, and real estate rentals. The new law only eliminated the deduction for work-related expenses for traditional employees.
How do changes to the standard deduction affect itemized deductions?
As you may have heard, the standard deduction for 2018 doubled – or nearly doubled – for taxpayers in all filing statuses. Most people will find it’s not beneficial to itemize their deductions because the new, larger standard deduction provides more benefits.
If you’re not itemizing deductions, it no longer matters whether you can deduct unreimbursed job expenses as miscellaneous itemized deductions.
What should I do if my unreimbursed job expenses are substantial?
If you have a lot of unreimbursed job expenses, the first thing you may want to do is see if your employer will cover the cost. Your employer can still deduct all qualified employee expense reimbursements. That is why now is a great time to bring the subject up to your employer so you know what to expect come tax season.
If your employer decides to reimburse your expenses, make sure they use an “accountable plan” that meets all IRS requirements. Using an accountable plan allows your employer to deduct reimbursed expenses and not include the reimbursed amount with your wages on Form W-2. If your employer does not use an accountable plan, any reimbursements must be included on your Form W-2 as taxable income.
Another option is to see if you qualify to work as an independent contractor. If you often have a large number of unreimbursed job expenses, and you meet other independent contractor guidelines set by the IRS, it might be more beneficial to be classified that way. Just be sure you are paid a higher gross amount as a contractor than you were as an employee. That’ll help make up for the lost employer-paid Social Security, Medicare, and other benefits lost.