Congress gives Employee Expense Deductions the Pink Slip
We hope it’s just an unfounded rumor, but we’ve heard some people find tax talk to be a bit boring. That’s why we try to incorporate humor into these blogs, but today’s topic is no laughing matter. We want to look at an area of the recently passed Tax Cut and Jobs Act (TCJA) that could hurt some taxpayers.
While various changes in the TCJA (our summary is here) will benefit lots of taxpayers, the law eliminated one popular source of deductions for many. As of 2018, Miscellaneous Itemized Deductions will no longer be a part of Schedule A. Previously, taxpayers could take several types of deductions that were grouped into the category of “miscellaneous expenses.” Tax preparation fees, safe deposit boxes, and investment fees could have been deducted here, but the most popular deduction was Unreimbursed Employee Expenses.
Prior to the TCJA, the IRS allowed employees to deduct “ordinary and necessary” expenses incurred while doing their jobs if their employers did not reimburse them. We mentioned in our last blog that nurses were allowed to deduct the cost of scrubs, license fees, and travel costs. Salesmen could deduct hotel costs and mileage, while mechanics could deduct tools they purchased. Other common write-offs included professional dues and subscriptions, uniforms, supplies, and even home offices. None of these employee expenses can be deducted on the 2018 tax return.
Miscellaneous Itemized Deductions came with some tough requirements. The IRS had strict guidelines as to what constituted an “ordinary and necessary” expense (although this was often abused and this misuse of the deduction may have contributed to its demise). Qualifying expenses had to exceed 2% of the taxpayer’s Adjusted Gross Income to be deductible. This was a fairly steep threshold for most taxpayers to meet. The amount of expenses exceeding the threshold was added to other itemized deductions (medical expenses, state and local taxes, mortgage interest, and charitable donations); only if this total was greater than the standard deduction did itemizing make sense. Because the value of the deduction was based upon the return’s tax bracket, each dollar itemized might have saved only 15 or 25 cents, making the deduction worth less than many realized.
Because the TCJA nearly doubled the standard deduction, many who took miscellaneous deductions will no longer itemize and won’t feel this loss. However, some taxpayers, such as traveling salesmen and travel nurses, may have been deducting large amounts and therefore will end up paying more tax under the new law.
Some have suggested that those hurt by the loss of this deduction should consider switching to independent contractor status. However, the IRS has strict guidelines as to the classification of a W-2 employee versus an independent contractor. It is not simply a choice; it is a matter determined by a long list of factors. Even if it is permissible to make the change in employment status, the loss of employee benefits and the addition of self-employment tax probably make this a poor choice.
The better option is for employees who routinely incur out-of-pocket expenses to discuss the new tax law with their employers. Ideally, employers will establish an accountable plan (meaning the employee must follow certain guidelines, keep receipts, and request reimbursement in a timely manner) to reimburse expenses. Amounts paid under an accountable plan are not taxable to the employee but can be deducted as expenses by the employer.
If you have questions about the elimination of Miscellaneous Itemized Deductions and the effect this will have on your taxes, give us a call. We’ll be happy to discuss this or any other tax issue with you so you’ll be prepared for the changes awaiting next year’s return. We can’t promise that paying your taxes will suddenly become more fun, but we can try to make the process a little less taxing!