Let’s look at this question by starting with the example of Fred, who just returned to his desk slightly out of breath. He gasped “I just got back from driving my own car to our company warehouse to pick up some parts that we need, so that this afternoon we can complete that rush order we’ve been working on. Although our company pays a per diem allowance when we travel overnight for work, it doesn’t reimburse us when we take short trips like this in our own vehicles. But it’s no big deal – I’ll be able to deduct the mileage on my taxes, right?”
Fred has made a quite logical assumption here. After all, it is one of the guiding principles of the taxation system that we calculate our net taxable income as employees each year to be the total wages we received, minus the ordinary and necessary expenses we incurred in earning those wages. Fred is thinking that, because his employer will not pay his mileage costs, he should be able to deduct those unreimbursed employee expenses on his next tax return.
And Fred’s statement was completely correct, up until the beginning of the 2018 tax year. However, in late 2017, Congress passed a broad-reaching tax reform bill, known as the Tax Cuts and Jobs Act (TCJA), which removed the deduction for unreimbursed employee business expenses. Up until then, Fred and other employees were able to deduct these expenses on their itemized tax returns. There were some limitations, such as that the expenses were only deductible to the extent that they exceeded 2% of an employee’s adjusted gross income for the year. Nevertheless, unreimbursed employee expenses were a very common deduction on taxpayers’ Schedule A, Itemized Deductions forms.
But according to the terms of the TCJA, the removal of the deduction for unreimbursed employee expenses was not permanent. Unless Congress makes further changes, the deduction will be reinstated, beginning with the 2026 tax year.
However, not all employees have to wait until 2026 to be eligible to deduct their unreimbursed employee expenses. There are certain categories of employee who can continue to claim the deduction. These are:
- Armed Forces reservists
- Qualified performing artists
- Fee-basis state or local government officials
- Employees with impairment-related work expenses
- Eligible educators
- Self-employed individuals
Taxpayers in these categories may continue to deduct their ordinary and necessary unreimbursed business expenses.
Just to clarify, an expense is “ordinary” if it is common and accepted in a taxpayer’s trade, business, or profession. And an expense is “necessary” if it is appropriate and helpful to the taxpayer in their work. The deductions for these expenses are not subject to the 2% limitation mentioned earlier, but eligible educators are limited to a maximum of $250 (per person) of qualified out-of-pocket expenses paid in 2021.
An eligible educator is a person who spent at least 900 hours during a school year as a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in school. Qualified expenses for eligible educators would include books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom.
To return to our original question, it looks like Fred is out of luck, unless he fits into one of the special categories that we reviewed. But his teacher wife, Wilma, could deduct up to $250 of her unreimbursed expenses related to her full-time work at school in 2021. And better still, for the 2022 tax year, the limit for this deduction is increased to $300.