Deduct Unreimbursed Employee Business Expenses on a 2017 Tax Return
The new tax law eliminates this deduction from 2018 until 2025
It might seem unfair that you have to spend money to make money, particularly when you're not self-employed. The Internal Revenue Service agrees with you, at least to some extent. Employees who incur job-related expenses can deduct some of those costs on their federal tax returns, at least through the 2017 tax year.
The Effect of 2018 Tax Reform
When the Tax Cuts and Jobs Act was signed into law in December 2017, it sounded a temporary death knell for a good many itemized deductions. The deduction for unreimbursed employee business expenses was one of them. The TCJA eliminates it for tax years 2018 through 2025.
If you haven't yet filed your 2017 return, you can still claim this deduction. You can even go back and file amended returns for the 2015 and 2016 tax years to claim it. You generally have a three-year window of time in which to file an amended return.
A Word of Caution
Because this is an itemized deduction, you'll have to go through all the recordkeeping, calculations and other tedium that itemizing entails if you're going to claim it. It will take you longer to prepare your tax return, and if you hire someone to prepare it for you, it will most likely cost you more.
This isn't intended to discourage you, but make sure that you have sufficient unreimbursed employee expenses that you'll still come out ahead when you figure in what it will cost you in time and money to claim them.
Itemizing also means that you can't claim the standard deduction for your filing status. If the total of all your itemized deductions doesn't exceed the standard deduction you're entitled to, it's not in your best interest to itemize—you'll actually end up paying more in tax dollars.
It might be gratifying to use those expenses to shave a smidgen off your tax obligation, but you might do better to ask your employer to reimburse you for what you spent instead.
Eligibility for the Employee Business Expense Deduction
"Unreimbursed" is the key word here. Make sure your employer hasn't paid you back for what you spent. He didn't give you an advance toward these costs or an allowance to pay for them. If any of these circumstances apply, you can't claim the deduction.
If you had to give your employer an accounting explaining exactly what the money was spent on, it was most likely an advance or an allowance, particularly if you had to return any money that was left over. Not only are these expenses not deductible, but the money given to you might appear in box 12 of your W-2 as income on which you must pay taxes.
Another rule states that the things you spend money on must be ordinary and necessary business expenses for your employer. "Ordinary" means that most people in your line of work—or their employers—spend money on the same thing. "Necessary" means the purchase or expense was more or less integral to doing business.
Employees can incur a wide variety of expenses related to their jobs, but these five broad categories of tax-deductible job expenses are the ones that are most often claimed.
These include costs associated with using your personal vehicle for work-related reasons. You can either deduct a portion of your actual driving expenses based on your work-related mileage, or you can use the standard mileage rate set by the IRS each year. The rate was 53.5 cents per mile in 2017.
Allowable miles are limited to getting from one workplace to another, visiting clients or customers, going to a business meeting away from your regular workplace, or getting from your home to a temporary workplace when you have one or more regular places of work. Commuting is not included.
Parking, Tolls, and Local Transportation
These are separate from vehicle expenses like fuel, oil, insurance, and maintenance. They include the other costs of travel such as bus fare, train fare, or taxi fare. Again, certain expenses are disallowed.
If you have to pay to park your vehicle at your workplace, this isn't deductible. As long as you're driving for business purposes and not for commuting, however, these costs can be deducted.
Travel, Meals, and Entertainment
Travel expenses include the cost of hotels, airfare, and car rental if you must travel away from your home at least overnight.
If you're having a meal with or entertaining clients, customers, or other employees, these costs are deductible when they're directly related to conducting business. "Directly related" means that the purpose of the gathering was to conduct business, that you did indeed engage in business, and that you—or your employer—had every reason to believe that the event would result in income.
Typically, only half the cost of meals and entertainment are tax deductible, but there are some exceptions to this rule.
Other Business Expenses
These include any expenses that aren't included in the above categories, such as the cost of business cards, subscriptions to trade and business publications, home office expenses, business gifts, and work-related education. They can also include any tools or equipment that might be necessary to doing your job.
How to Deduct Employee Business Expenses
Claiming employee business expenses begins with completing Form 2106 to figure out the total amount of the deduction you're entitled to. If you want to deduct your actual vehicle expenses, complete page 2 of this form to calculate your deduction based on the miles you drove. The shorter Form 2106-EZ can be used if you want to claim the standard mileage rate instead.
You can then enter the deduction you've calculated on line 21 of Schedule A, the form you must use to itemize your deductions. Add up all your itemized deductions on the schedule and enter the total on line 40 of your Form 1040 in place of the standard deduction you'd otherwise be entitled to.
Other itemized deductions include costs such as uninsured medical and dental expenses, health insurance premiums in some cases, home mortgage interest, and charitable contributions. When you've completed Schedule A, the total of all these deductions should exceed the amount of the standard deduction you're entitled to or you'll be paying tax on more income than you have to.
The AGI Limitation
This is a "miscellaneous" deduction and all miscellaneous deductions are reduced by 2 percent of your adjusted gross income or AGI. What's left over is the amount you can claim as a deduction and enter on Schedule A.
For example, if your AGI is $80,000, you can only claim a deduction for the amount of your total miscellaneous expenses that exceed $1,600, or 2 percent of $80,000. If you have $1,800 in expenses, you'll get a $200 deduction. If your miscellaneous expenses don't add up to 2 percent of your AGI, they don't qualify for the deduction at all.
Assuming you meet all these rules and you want to deduct your work-related expenses, the IRS might expect you to be able to substantiate them, particularly if the total is significant. You'll need proof for each expense you claim showing the description of what you spent money on as well as the amount, the business purpose and relationship, and the date and place where the expense was incurred.