If you are an employee and incur work-related expenses on behalf of your employer, and such expenses are not reimbursed by your employer, you may be able to deduct those unreimbursed employee expenses if you itemize your deductions on Schedule A of Form 1040. You may be required to attach Form 2106 or 2106-EZ to your return. These job expenses are deductible as Miscellaneous Itemized Deductions subject to a 2 per cent of your Adjusted Gross Income (AGI) disallowance. For example, if your AGI is $50,000 and your unreimbursed employee job expenses are $1,200, $1,000 of these expenses would be disallowed (2% of $50,000) and you would have a $200 tax deduction to deduct from your AGI.
A good starting point for determining what are allowable unreimbursed employee expenses is your employer’s reimbursement policy on expenses incurred by employees. If your employer’s policy says that the employee is expected to incur certain expenses or the employee was hired because of certifications the employee holds, and the employer does not reimburse the employee for such expenses, they likely are tax deductible. If the employer’s reimbursement of the expenses is less than your actual costs, then the unreimbursed portion is tax deductible. For example, if your employer provides you with a per diem meal allowance of $50 when traveling, and your actual meal expense was $65, you can deduct the $15 that you paid if the cost incurred was reasonable. If you incur expenses that your employer’s policy does not address but you believe that those expenses enhance your skills, the IRS may challenge those expenses as not being ordinary and necessary. For example, to perform your job at the highest level, you subscribe to various periodicals that your employer refuses to purchase for you. You may need to show a direct connection between those expenditures and your job to be tax deductible.
In order to be reimbursed and/or deducted, trade or business expenses must be ordinary, necessary, and reasonable. They also must be properly substantiated. Examples of qualifying expenses include:
Travel, transportation, meal, or entertainment expenses
Safety equipment, small tools, or supplies
Uniforms required by your employer that are not suitable for everyday wear
Required protective clothing
Dues to professional organizations
Subscriptions to professional journals
Certain expenses for the business use of your home
Computer costs
Work-related educational expenses
You may also benefit from a review of the business expenses related to the use of your home. If you qualify for the home office deduction, you may be able to deduct part of your home’s normal operating expenses, such as utilities and insurance. The tax-savings opportunities available to you are dependent not only on the type of work you do at home, but where in your home you perform it. For employees to be able to claim a home office deduction, the employer must require that the employee maintain an office at home. For example, a sales rep may be required to maintain an office in the home.
The rules for deducting these expenses, as well as substantiating your deduction, vary according to the type of expense involved. It is important to retain all records and receipts that document the time, place, and business purpose of each expense.
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