Are You Missing Out on These Educator Tax Deductions?
February 4, 2019
Legislation passed late in 2015 made many "tax extenders" semi-permanent, but there are still a few esoteric items that keep everyone on tenterhooks when, as once again this year, Congress fails to pass the tax bill by the end of the year. The new Congress is likely to make them retroactive once they finally do pass the bill in 2019.
In addition, 2018 is the first tax year that most of the new provisions of last year's tax reform apply, so there are a lot of changes.
The tax reform does keep the $250 above-the-line deduction for classroom supplies. The $250 deduction is particularly advantageous because it is an above-the-line deduction on Schedule A, which means you don't have to itemize to take it and it reduces your overall adjusted gross income (AGI). This becomes even more important under the tax reform because it virtually doubles the standard deduction, setting the threshold even higher for choosing to itemize. The 2015 legislation indexed the amount to inflation—though it is unchanged at $250 for 2018—and allows professional development expenses to be included in the deduction.
However, the tax reform, officially known as the Tax Cuts and Jobs Act, eliminates itemized deductions for employee business expenses starting in 2018 for the 10-year life of the act. This allowed educators to itemize expenses beyond the $250 as deductions, subject to the 2% threshold of AGI for miscellaneous deductions.
Educators may still benefit from the state and local sales tax deduction (an alternative for states with no state income tax to deduct from federal taxes) even though those breaks don't target them specifically. However, you must itemize in order to claim these deductions. For 2018 and beyond, the deduction for state and local taxes, including property taxes, will be capped at $10,000 and the threshold for choosing to itemize will be much higher with the increased standard deduction.
Many provisions of the tax code have income caps and phase-outs and other wrinkles that may affect your actual tax liability. Be sure to work with a tax advisor or reliable tax software that clearly addresses your situation, especially if you are in the higher income brackets. And keeping receipts or a careful log is critical for the classroom supplies deduction and other tax benefits.
Other situations faced by educators preparing their taxes include:
Income from outside work, such as a summer job or tutoring
If there is no additional withholding on this outside work, you want to be sure to avoid a penalty for under-withholding—i.e., when your overall tax liability exceeds the amount of tax you had withheld by certain margins.
If this is the first year you have had extra income, there won't be any penalty, because your withholding at work will cover 100% of your previous year's income. If you regularly have extra income, your best option is to specify a certain additional amount on your W-4 to be withheld. (Previously, it was possible to adjust your withholding by reducing the number of personal exemptions but these have now been removed in the tax reform.) The other remaining option is make quarterly payments of estimated tax on the additional income.
The outside income should be reported on a Schedule C, where you can also deduct any expenses associated with the outside job. You are also liable for "payroll" taxes (these are the contributions to Social Security and Medicare) on the extra income, which is calculated on a Schedule SE.
Other unreimbursed employment expenses
As noted above, the itemized deductions for employee expenses beyond the $250 have been eliminated in the tax reform, so that deduction is no longer available.
Rules for deducting expenses for a home office are fairly strict (as well as for equipment such as computers). The home office space must be used exclusively for work purposes, which is a tough criterion.
Congress eventually renewed the deduction for college tuition and fees retroactively for 2017, restoring one of the options for a tax break if you take courses that you pay for yourself, whether or not they are required for certification. This allows you to deduct up to $4,000 above the line, so you don't have to itemize to claim it. Whether it will be extended through 2018 is uncertain. The remaining option, which is a permanent part of the tax code, is the Lifetime Learning Credit for 20% of education expenses up to $2,000. This is a credit, so it is taken off your tax liability dollar for dollar. However, it is nonrefundable, which means you have to have some tax liability for it to count against. The American Opportunity Credit, which can apply to the first four years of higher education, is not usually an option for educators.
NOTE: All of the information in this article is accurate as of January 11, 2019.