Who Can Deduct Unreimbursed Employee Expenses?

Unreimbursed employee expenses are costs you pay for your job that your employer does not reimburse. The Tax Cuts and Jobs Act of 2017 (TCJA) suspended the deduction for most of these expenses for tax years 2018 through 2025. This change affects most W-2 employees, making the ability to write off out-of-pocket job costs unavailable for the majority of the workforce.

Previously, employees could deduct these costs as a miscellaneous itemized deduction on Schedule A (Form 1040) if the total exceeded 2% of their adjusted gross income (AGI). The suspension of this deduction means common expenses like non-reimbursed vehicle use, home office costs, and work-related travel are not deductible for most employees.

This legislative change simplified the tax code for many by encouraging the use of the higher standard deduction, but it eliminated a write-off for employees who incur significant job-related costs. Unless Congress changes the law, this suspension is set to expire after the 2025 tax year. This makes understanding an employer’s reimbursement policy important, as it is the primary way to be compensated for work-related expenditures.

Exceptions for Specific Employee Categories

While the general rule is restrictive, the tax code provides exceptions for a few specific categories of employees. These individuals can still deduct their unreimbursed work-related expenses as an adjustment to their income, which is more advantageous than an itemized deduction. These exceptions are narrowly defined, and taxpayers must meet specific criteria to qualify.

Armed Forces Reservists

Individuals who are members of a reserve component of the Armed Forces of the United States fall into this category. To qualify, you must travel more than 100 miles away from home in connection with your performance of services as a reservist.

The expenses that can be deducted are primarily the travel costs for attending reserve meetings or drills. This includes transportation, lodging, and a portion of meal expenses incurred during the trip. Careful records of travel dates, mileage, and lodging receipts are necessary to substantiate the deduction.

Qualified Performing Artists

The tax code provides a specific definition for a “qualified performing artist.” To meet this definition, an individual must perform services in the performing arts as an employee for at least two employers during the tax year and receive at least $200 in wages from each.

Furthermore, the allowable business expenses related to their artistic work must exceed 10% of their gross income from performing. Finally, their adjusted gross income, before deducting these expenses, cannot exceed $16,000. This combination of requirements narrows the pool of eligible artists.

Fee-Basis State or Local Government Officials

This exception applies to individuals who are employed by a state or local government and are compensated, in whole or in part, on a fee basis. This means their pay is directly tied to the fees collected for the services they perform, rather than receiving a set salary.

These officials can deduct their work-related expenses that are directly attributable to their fee-basis service. If an official receives both a salary and fees, they can only deduct the expenses related to the fee-based portion of their job, which requires careful allocation of expenses.

Employees with Impairment-Related Work Expenses

Employees with physical or mental disabilities can deduct their impairment-related work expenses. These are defined as expenses for attendant care services at the place of work and other expenses necessary for the individual to be able to work.

These are not general medical expenses but are specifically tied to enabling the person to perform their job. For example, the cost of a reader for a visually impaired employee or a sign language interpreter for a hearing-impaired employee during a business meeting would qualify.

Qualifying Expenses and Required Documentation

For the specific categories of employees who remain eligible, any claimed expense must be both “ordinary and necessary.” An ordinary expense is one that is common in your trade or business, while a necessary expense is one that is helpful and appropriate for your job.

For vehicle expenses, you can use either the standard mileage rate or the actual cost method. The actual cost method involves tracking all vehicle-related expenses like gas, oil, repairs, insurance, and depreciation. Other common deductible expenses include:

• Travel expenses for business trips away from home, including transportation, lodging, and 50% of meals.
• The cost of tools and supplies required for your job.
• Required uniforms that are not suitable for everyday wear.
• Work-related education.

To properly claim these costs, you must maintain thorough documentation, such as receipts, canceled checks, or credit card statements. For travel and vehicle use, a log detailing the date, mileage, destination, and business purpose of each trip is required. Without this documentation, the IRS can disallow the deductions.

How to Claim the Deduction

Once you determine you belong to an eligible employee category and have gathered your expense documentation, you can claim the deduction. You must first complete Form 2106, Employee Business Expenses, using your records to calculate the final deductible amount.

The total from Form 2106 is then transferred to Schedule 1 (Form 1040), Additional Income and Adjustments to Income. This means the deduction is an “above-the-line” adjustment to income, so you do not need to itemize your deductions on Schedule A to benefit from it.

Taking the deduction as an adjustment to income lowers your adjusted gross income (AGI). A lower AGI can help you qualify for other tax credits and deductions that have income limitations.

Distinctions for Other Worker Types

The rules for unreimbursed employee expenses are specific to individuals classified as employees. Different rules apply to other types of workers, and it is important not to confuse them.

Self-Employed Individuals

Self-employed individuals, including independent contractors and freelancers, are not considered employees. They report their income and expenses on Schedule C (Form 1040), Profit or Loss from Business. On Schedule C, self-employed taxpayers can deduct all ordinary and necessary expenses related to their trade or business. The suspension of miscellaneous itemized deductions under the TCJA did not affect the ability of self-employed individuals to deduct their business costs.

Eligible Educators

Certain educators have a separate deduction for their unreimbursed classroom expenses. An “eligible educator” is a K-12 teacher, instructor, counselor, principal, or aide who works at least 900 hours in a school year. They can deduct up to $300 for out-of-pocket costs for books, supplies, and other materials used in the classroom. This Educator Expense Deduction is an adjustment to income claimed on Schedule 1 (Form 1040) and was not affected by the TCJA’s suspension of miscellaneous itemized deductions.