Beginning in 2018, unreimbursed employee expenses are no longer eligible for a tax deduction on your federal tax return

MKG Tax Consultants News, View Points, Taxes & Finances

Beginning in 2018, unreimbursed employee expenses are no longer eligible for a tax deduction on your federal tax return

The vast majority of W-2 workers can’t deduct unreimbursed employee expenses in 2020. The Tax Cut and Jobs Act (TCJA) eliminated unreimbursed employee expense deductions for all but a handful of protected groups.

The TCJA restriction lasts until 2026, when miscellaneous itemized deductions are slated to return for all employees.

Unreimbursed employee expenses don’t apply to those who aren’t classified as employees. Therefore, independent contractors and other business owners can deduct ordinary and necessary business expenses.

You can continue to deduct unreimbursed employee expenses if you are part of one of the following groups:

Armed Forces reservists: Members of a reserve component of the military can keep deducting unreimbursed expenses.

Qualified performing artists: This definition is narrow. The performing artist — a musician or actor — needs to have at least two employers in a year, earn at least $200 per employer, and report $16,000 or less in adjusted gross income. Earnings made any other way cannot exceed 10% of the person’s total earnings.

Fee-basis state or local government officials: These cases are rare. Those employed by a state government and are paid by fees, at least in part, fall into this category. A salaried government official likely wouldn’t qualify.

Employees with impairment-related work expenses: Employees with physical or mental disabilities can deduct expenses they incur to be able to work. Expenses could include the cost of attendants and equipment necessary to do their jobs.

The unreimbursed business expenses exemption began with 2018 tax returns. This means employees can no longer offset their taxable income with employee business expenses.

What Were The Previous Rules About Unreimbursed Employee Business Expenses?

Prior to 2018, an employee could deduct unreimbursed job expenses to the extent these expenses, along with certain other miscellaneous expenses, were more than 2% of their Adjusted Gross Income (AGI). The employee would need to be eligible to itemize to deduct these expenses.

However, with tax reform, all miscellaneous “2%” expenses, including unreimbursed employee expenses are not allowed between 2018 and 2025. Expenses such as union dues, work-related business travel, or professional organization dues are no longer deductible, even if the employee can itemize deductions.

Self-employed taxpayers may continue to deduct ordinary and necessary business expenses against self-employment income on Schedule C or Schedule F.

IRS Audit Period Is 3 Years, 6 Years Or Forever: How To Cut Your Risk. But in some cases, even though you filed and thought everything was in order, the statute of limitations on the IRS ability to audit you never runs. The basic rule is that the IRS can audit for three years after you file, but there are many exceptions that give the IRS six years or longer. For example, the three years is doubled to six if you omitted more than 25% of your income. This 25% rule can apply to tax basis too.