Since employees might incur a wide variety of expenses related to their job, this article will cover only the following broad categories of tax-deductible job expenses
- Vehicle expenses
- Parking, tolls, and local transportation expenses
- Travel expenses
- Meals and entertainment expenses
- Other business expenses
For additional information on tax-deductible job expenses, please refer to the IRS website, https://www.irs.gov.
Recordkeeping is particularly important for job-related expenses. Whether you seek reimbursement from your employer or take a deduction on your personal tax return, the IRS expects business expenses to be adequately substantiated. Adequate substantiation means that for each expense, you have documents to show the description, the amount, the business purpose and relationship, and the date and place where the expense was incurred. For general information on recordkeeping, please refer to the IRS website, https://www.irs.gov.
An employee's business expense reimbursement or allowance under a plan that qualifies as an "Accountable Plan" is excluded from the employee's gross income and is not reported on the employee's W-2, i.e., it is tax-free to the employee and tax-deductible to the employer. In addition, these amounts are not subject to withholding or employment taxes.
In contrast, amounts paid under a "Non-Accountable Plan" are included in the employee's W-2 wages and are deductible as miscellaneous itemized deductions, subject to the 2 percent Adjusted Gross Income (AGI) limitation. In other words, because of the 2% AGI limitation, only a part of these job-related expenses are deductible. In addition, deductions may be further limited by the overall limitation on itemized deductions.
While it is generally in the best interest of the taxpayer to maximize deductions, please be aware that in some instances, these deductions may lower your income to the point where your debt-to-income ratio could adversely affect your ability to qualify for a mortgage loan.
If you are considering qualifying for a mortgage loan, be sure to discuss any employment deductions with your loan officer.
The information presented in this article is meant as a general guide. Before taking action and for specific questions regarding your particular tax situation, please refer to the IRS website, https://www.irs.gov, or consult a tax specialist.