Commitment to your job sometimes requires digging into your own pocket to purchase a uniform or treat a client to 18 holes of golf. But such unreimbursed expenses can pinch financially, unless you learn IRS rules for deducting work-related costs from your taxable income. Fastidious record keeping and advice from a tax professional can also help mitigate the suffering.
"Many of my clients with unreimbursed expenses hold sales-related positions," says tax preparer Jennifer MacMillan, a member of the California Society of Enrolled Agents. Still, MacMillan's clients who take these deductions include real estate agents, customer service representatives, carpenters, teachers and computer technicians.
Here's a guide to getting the write-offs you deserve.
Three Hurdles to Deduction
The good news: Many unreimbursed employee expenses can be deducted. The bad news: You'll have to clear three hurdles before you can claim them on IRS Form 2106 or 2106-EZ:
- To claim most work-related expenses, you must itemize deductions.
- You can deduct only the portion of your work-related expenses that exceeds the IRS floor: 2 percent of adjusted gross income.
- If your 1040 says you must pay the alternative minimum tax (AMT), you cannot take work-related deductions. Created in the 1960s to ensure the wealthy pay their fair share, the AMT is increasingly hitting middle-class earners.
If you've tripped on one of these hurdles, there may be a workaround. "A salesperson could speak to his employer and say, ‘Look, I'm laying out these expenses and not even getting a tax deduction,' " says Michael Mongelli, a CPA and tax principal with accounting firm Sax Macy Fromm. "The employee could ask the employer to make the expense reimbursable and adjust the sales commission if necessary." The business could then take the tax deduction and share the savings with the employee.
Costs You May Be Able to Deduct
Once past these hurdles, you can deduct a wide variety of employment-related expenses, including:
- Transportation and Travel: Sometimes considered unreimbursed costs and therefore deductible. For example, commuting costs cannot be claimed, but the expense of getting from a job with one employer to a second job with another is deductible. The per-mile reimbursement rate varies according to activity.
- Meals and Entertainment: They may be deductible but only at half the actual cost. As with many deductions, scrupulous records are required. Work-related doesn't mean the pizza you ordered at your desk. It implies you were with colleagues or clients and discussing business matters.
- A Computer or Home Office: If used exclusively for work, they may be deductible.
- Union and Professional Dues, and Work-Related Licenses, Legal Fees and Medical Examinations
- Uniforms, Tools, Supplies and Magazine Subscriptions: They may be deducted if not reimbursed by the employer.
- Work-Related Educational Expenses: Deductible if the coursework is required by your employer or helps you maintain or improve your qualifications in your current line of work.
- Job Search Expenses: Generally are deductible, but only to change jobs within your current field.
Of special interest to workers in hazardous environments: "Safety gear is deductible even if it's not required," says Donna Le Valley, a contributing editor for J.K. Lasser's Your Income Tax.
Caution: Deductions Increase Your Audit Risk
Work-related deductions may draw an IRS audit, especially if expenses are large in relation to income. Some of MacMillan's clients in sales take more than $20,000 in mileage deductions. "Although the IRS doesn't disclose how they score returns for audit, that's got to score high."
According to Le Valley, "The biggest audit trigger is going to be the difference between last year's return and this year's."
The key is to keep complete records, following IRS rules. "It's better to be Felix Unger than Oscar Madison," says William Abrams, a CPA and tax lawyer with Abrams Garfinkel Margolis Bergson LLP. "It's quite a thing to prove yourself right without the contemporaneous records."
Still, you should deduct what you're entitled to. Even when an expense seems unusual, if it's legitimate and well-documented, taxpayers shouldn't fear claiming the deduction, Le Valley says.