Tax Reform Eliminates Deduction for Work Expenses, Mileage
Notably, the new Tax Cuts and Jobs Act (TCJA) scales back deductions for certain itemized deductions, including state and local tax (SALT) payments and mortgage interest. But another lesser-noticed crackdown may be just as significant. Effective for 2018 through 2025, the TCJA completely eliminates the Schedule A deduction for miscellaneous expenses. This change can be especially harmful to employees who pay job-related expenses out of their own pocket.
The repeal amounts to more than just mere chump change. Millions of taxpayers who have deducted miscellaneous expenses in the past won’t be entitled to a write-off on their 2018 returns. It’s another reason why more taxpayers will be claiming the increase standard deduction instead of itemizing. For the same time period, the TCJA essentially doubles the standard deduction to $12,000 for single filers and $24,000 for joint filers.
Under prior law, you could deduct the amount of your miscellaneous expenses exceeding 2% of your adjusted gross income (AGI) for the year. For instance, if you had an AGI of $100,000 and you incurred $3,000 in deductible miscellaneous during the year, you could write off $1,000.
Perhaps the biggest losers in this new scenario are employees who pay certain expenses without being reimbursed by their employers. This includes costs ranging from travel expenses for salespeople to tools for construction workers to scrub tops for nurses. It also applies to certain home office expenses, hobby losses, union dues and job-hunting expenses, just to name a few more.
Conversely, self-employed individuals generally don’t have to contend with this problem. They still may be able to deduct these expenses on Schedule C.
In addition, a taxpayer could add to their miscellaneous expense deduction other costs relating to the production or preservation of income, such as custodial fees for investments and IRAs, legal fees in a divorce, appraisal fees required for charitable contributions of property and even the cost of tax advice and tax return preparation services you provide to clients.
There’s not much that taxpayers can do about the loss of income production and preservation expenses. But they might arrange, when possible, to have their employers reimburse them for their job-related expenses. For example, an employer may decide to provide a flat allowance for routine expenses. In this case, the employees don’t have to keep records on how much they’ve spent or for what purpose. The caveat: Unless other requirements are met, the reimbursements are fully taxable to the employees, without any corresponding deduction.
Practical solution: An employer may establish an “accountable plan” for expenses like travel expenses. With this type of setup, employees must provide detailed records that are supported by contemporaneous documentary evidence. But the extra hassle may be well worth it to avoid the additional tax liability and this can offset the loss of miscellaneous expense deductions. Of course, the employer has to go along with the deal.
And what if an employer won’t budge on this issue? Your clients who are employees might try asking for a raise to help close the gap.