If you're paying out of pocket for work expenses, you may be able to deduct them on your tax return, reducing your taxes. The IRS allows employees to write off their unreimbursed expenses, and business owners to count them against gross income. There are a few important guidelines to remember when reaching for your calculator.
Unreimbursed v. Reimbursed
For employees, deductible expenses must be unreimbursed. That means your employer can't pay for them, or otherwise compensate you for the expense. If you need to buy a uniform for the job, and the money comes out of your pocket, you can deduct that expense. The same goes for tools of your trade, transportation expenses (but not commuting costs), or even the use of a home office to do your job.
To write off a work expense as an employee, you must itemize deductions on Schedule A of your Form 1040. You list the employee expenses on Form 2106. The expenses must be "ordinary and necessary," and you must pay for them, or incur them, in the year for which you're writing them off. Such an expense could be a license fee for an insurance agent, the cost of a required medical exam, or tuition for a work-related college course. You can also deduct the costs of a job search, as long as you are looking for work in the same profession as your previous job.
The 2 Percent Rule
In order to be deductible, employee expenses must exceed 2 percent of your adjusted gross income, as figured on your Form 1040 on Line 38. Only that portion of the expenses that exceeds the 2 percent limit is deductible.
Sole Proprietors and the Self-Employed
If you work for yourself, or have a business as a sole proprietor, you may claim work-related expenses by subtracting them from your gross income on Schedule C, Profit or Loss from Business. These deductions include travel expenses, insurance premiums, depreciation on property, rent, utilities, advertising, tax advisory fees and the cost of goods and labor. The entire expense is deductible; there are no limits depending on your adjusted gross income.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.