What Can W-2 Employees Write Off on Their Taxes?
For W-2 employees, deducting work expenses is no longer straightforward. This guide clarifies current federal tax limitations and available financial strategies.
A W-2 employee works for an employer that directs and manages their work, receiving a regular wage and a Form W-2 each year. The Form W-2 reports their annual earnings and the taxes withheld. The rules governing tax deductions for these employees have undergone significant changes. Understanding which expenses can and cannot be deducted is a common concern for many taxpayers.
The Suspension of Most Employee Business Deductions
A major change in federal tax law altered the ability of W-2 employees to deduct work-related expenses. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended the miscellaneous itemized deduction for unreimbursed employee expenses for tax years 2018 through 2025. Before this act, employees could deduct job-related costs that exceeded 2% of their adjusted gross income (AGI). This suspension means most employees cannot write off these out-of-pocket costs on their federal returns.
The suspension affects a wide range of common costs. Examples of currently non-deductible expenses for W-2 employees include:
- Home office expenses, even for remote work
- Unreimbursed work-related vehicle mileage, travel, and meals
- Tools and supplies
- Work clothes and uniforms not suitable for everyday wear
- Union dues
- Work-related education and professional development
- Subscriptions to professional journals and dues for professional societies
- Fees for tax preparation services
This change makes employer reimbursement plans the primary method for employees to recover business-related costs. The deduction is scheduled to be reinstated in 2026, but this is subject to future legislative changes.
Specific Above-the-Line Work-Related Deductions
While the TCJA eliminated most employee deductions, a few specific categories remain. These are “above-the-line” deductions, which reduce a taxpayer’s adjusted gross income (AGI) and can be claimed even by those who take the standard deduction. These deductions are available only to select groups of employees for certain unreimbursed expenses.
Eligible educators can deduct up to $300 for classroom expenses. This applies to K-12 teachers, instructors, counselors, principals, or aides who work at least 900 hours in a school year. Qualified expenses include books, supplies, and other materials used in the classroom. If two eligible educators are married and file a joint return, they can deduct up to $600, with a maximum of $300 per person.
Other professions also have access to these deductions. Armed Forces reservists can deduct unreimbursed travel expenses for trips more than 100 miles from home to perform reserve duties. Qualified performing artists who meet specific income and expense criteria can deduct their business expenses. Fee-basis state or local government officials, compensated partly or wholly on a fee basis, can also deduct job-related expenses.
Deductions for Savings and Education
W-2 employees can also lower their taxable income by contributing to certain savings and education accounts. These are also “above-the-line” deductions available to all eligible taxpayers, regardless of whether they itemize.
Contributions to a traditional Individual Retirement Arrangement (IRA) can reduce current tax liability. The deductible amount depends on your income and whether you or your spouse are covered by a retirement plan at work. For those not covered by a workplace plan, the full contribution is deductible.
A Health Savings Account (HSA) is another option. Individuals covered by a high-deductible health plan can make pre-tax contributions to an HSA. If contributions are made with after-tax money, they can be deducted on a personal tax return. These funds can then be withdrawn tax-free for qualified medical expenses.
The student loan interest deduction offers relief for those paying for education. Taxpayers can deduct the interest paid on qualified student loans, up to a maximum of $2,500 per year. This deduction is subject to income limitations and phases out for higher-income earners.
State-Level Employee Expense Deductions
While federal law suspended most unreimbursed employee expense deductions, state-level rules can differ. Not all states conform their income tax laws to the federal code, meaning some still permit W-2 employees to deduct job expenses disallowed on federal returns. For example, states like California, New York, and Pennsylvania allow employees to deduct certain job-related costs on their state income tax return. An employee in these states might write off expenses for a home office, vehicle use, or professional dues.
The available deductions and processes vary by state, so employees should review their state’s specific regulations. Taxpayers in these states will often use a separate state-specific form to calculate and claim these expenses.
Employer Reimbursement Through Accountable Plans
The primary way for W-2 employees to receive tax-free compensation for work-related costs is through an employer reimbursement program called an accountable plan. When a business uses an accountable plan, reimbursements are not considered taxable wages. This means the money is not subject to income, Social Security, or Medicare taxes and is not reported on the employee’s Form W-2.
A reimbursement arrangement must meet three IRS requirements to qualify as an accountable plan. First, the expenses must have a business connection, meaning they were incurred while the employee performed their job duties. Second, the employee must substantiate these expenses to the employer within a reasonable period, which is considered to be within 60 days. This involves submitting receipts, mileage logs, or other documentation detailing the amount, time, place, and business purpose.
The third requirement is that the employee must return any excess reimbursement within a reasonable time, considered to be within 120 days. If an employer provides a cash advance and the employee’s expenses are less than the advance, the unspent portion must be returned. If a plan fails to meet any of these three rules, it is classified as a non-accountable plan, and all reimbursements are treated as taxable wages included in the employee’s income.