What can you do when you spend money out of your own pocket for your job and your employer doesn’t reimburse you? Deduct it! There’s an often-overlooked way for you to deduct unreimbursed employee expenses on your federal tax return. It’s called (not surprisingly) Form 2106 Employee Business Expenses, and it can put some of that money back in your pocket when you file your taxes. There are, of course, tests to be met and some restrictions, so let’s take a closer look at how much these expenses can lower your taxes, and whether or not you qualify.
In order to claim these expenses, you must itemize your deductions. If you take the standard deduction, then claiming your employee expenses will do you no good, unless the amount of the employee expenses you’re claiming puts you over the threshold for itemizing. For 2015, those amounts are $6,300 (single) $12,600 (married filing jointly) or $9,250 (head of household). On a side note, it’s always good practice to compare your itemized deductions against the standard deduction, just to see how close you are to these thresholds.
Once you’re itemizing, there’s another restriction: the 2% floor. This means that only the amount of employee expenses that exceed 2% of your adjusted gross income (AGI) can be deducted. If, for example, your AGI is $110,000, then only the amount of expenses that exceed $2,200 are deductible. But don’t be discouraged: over the course of a year these expenses add up fast, and are well worth the tracking effort.
Which expenses are deductible? Any expense that is ordinary and necessary in your business that is not reimbursed by your employer is fair game. Note that if you would otherwise be reimbursed if you asked or made a formal request of your employer, then the expenses are not allowed. On the other hand, you don’t need a direct order from your employer to spend the money in order for the expenses to qualify. Suppose you pick up the tab for a client lunch because you think it’s a smart move (which it is). Even though you were not directed to do so by your boss, you may still deduct the expense on your taxes, provided you were not reimbursed.
Other examples of ordinary and necessary expenses include vehicle usage (miles driven for work that are not commuting miles), work-related travel, equipment purchases, office supplies, promotional expenses, trade publications, and research expenses. If a home office is a requirement of your job, you can take a home office deduction on the 2106 as well. This is allowable only if the home office is for the convenience of your employer, not just you.
How much can you get back? Let’s run the numbers: Our simplified example is a married couple, filing jointly, with income of $110,000. Each spouse spends $2,500 per year on job related expenses, for a total of $5,000. Since they already itemize, they fill out a 2106 and discover that $2,800 of the $5,000 is deductible (due to the 2% floor). Because they are in the 25% tax bracket, that $2,800 deduction will net them $700 in tax savings. Granted, that’s nowhere near a dollar for dollar reimbursement of their $5,000 spent, but would you turn down $700 if it were offered to you?
If you are a full time salaried professional, you most likely have work-related expenses you assume are just have to eat – but fortunately the tax code says otherwise. It may be well worth keeping track of all your expenses throughout the year to see if you can use them to lower your tax bill.
If you think filing a 2106 might benefit you, feel free to contact me. I’m happy to run the numbers for you to see if you’re leaving money on the table, when you could be putting it back in your pocket.
John Schulte, EA