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 through the 2017 tax year and potentially again beginning in 2026.
The Effect of 2018 Tax Reform
The Tax Cuts and Jobs Act (TCJA) sounded at least a temporary death knell for a good many itemized deductions when it was signed into law in December 2017. The deduction for unreimbursed employee business expenses was one of those that were affected. The TCJA eliminates it for tax years 2018 through 2025.
You can still claim this deduction if you haven't yet filed your 2017 tax return, however. You might even be able to go back and file an amended return to claim it if you failed to do so when you could have. You have a three-year window of time to file an amended return starting from the date when you filed the original tax return or two years from the date when you last made a tax payment on that return, whichever is later.
And some employees are exempt from the TCJA ruling. Armed Forces reservists, fee-basis state or local government officials, qualified performing artists, and employees with impairment-related work expenses can still claim this deduction while the TCJA is in effect.
A Word of Caution
This is an itemized deduction, so you'll have to go through all the recordkeeping and calculations that itemizing entails if you're going to claim it. It will take you longer to prepare your tax return, and it will most likely cost you more if you hire someone to prepare your return for you.
Make sure 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 you can't claim the standard deduction for your filing status, so it's not in your best interest to itemize if the total of all your itemized deductions doesn't exceed the standard deduction you're entitled to. 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. They didn't give you an advance toward these costs or an allowance to pay for them. You can't claim the deduction if any of these circumstances apply.
It was most likely an advance or an allowance if you had to give your employer an accounting explaining exactly what the money was spent on, 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 Form 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 that 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, 54.5 cents per mile in 2018, 58 cents per mile in 2019, and 57.5 cents per mile in 2020. It increases to 56 cents a mile in 2021 if you're an employee who still qualifies for this deduction under the terms of the TCJA.
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 are 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. Complete page 2 of this form to calculate your deduction based on the miles you drove if you want to deduct your actual vehicle expenses. 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 16 of the 2020 Schedule A, the form you must use to itemize your deductions beginning with the 2018 tax year. Add up all your itemized deductions on the schedule and enter the total on line 12 of your 2020 Form 1040 in place of the standard deduction you'd otherwise be entitled to. Different lines will apply if you're filing your 2017 return or an amended return, but all lines are clearly labeled.
Other itemized deductions include costs such as uninsured medical and dental expenses, health insurance premiums, 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% of your adjusted gross income (AGI). What's left over is the amount you can claim as a tax deduction and enter on Schedule A.
For example, you could only claim a deduction for the amount of your total miscellaneous expenses that exceed $1,600, or 2% of $80,000, if your AGI is $80,000. You'd get a $200 deduction if you had $1,800 in expenses. Your expenses don't qualify for a deduction at all if all your miscellaneous expenses don't add up to 2% of your AGI.
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 should have proof for each expense you claim, showing the description of what you spent the money on, as well as the amount, the business purpose and relationship, and the date and place where the expense was incurred.