Are You Missing Out on These Educator Tax Deductions?
For much too long, Congress engaged in an annual ritual of waiting until the last minute to extend some four dozen tax benefits that have to be renewed virtually every year, including many that NEA members have come to rely on.
In the waning days of 2015, however, Congress surprisingly came together on a compromise tax bill that made many of these deductions and credits permanent, retroactive to the beginning of the 2015 tax year.
The tax extender bill passed in the final days of 2014 covered only the 2014 tax year retroactively. The new legislation, in principle, extends the benefits indefinitely, starting with the 2015 tax year. This includes both the $250 above-the-line deduction for classroom supplies and the tuition and fees deduction—both of special interest to educators.
The $250 deduction is particularly advantageous because it is an above-the-line deduction on Schedule A, which means you don’t have itemize to take it and it reduces your overall adjusted gross income (AGI). The new legislation indexes the amount to inflation and allows professional development expenses to be included in the deduction.
Educators may also benefit from the state and local sales tax deduction (an alternative for states with no state income tax to deduct from federal taxes) or other expired breaks that have been restored, even though those breaks don’t target them specifically.
Understand that 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 like 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, there are a couple of options to make sure you avoid a penalty. One is to increase your withholding in your permanent job, either by reducing the number of exemptions you take (which increases the amount of withholding) or by specifying a certain additional amount on your W-4 to be withheld. The other 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
The $250 educator’s expense deduction has now been extended indefinitely. You can deduct expenses for classroom supplies beyond that amount as unreimbursed employment expenses, which are defined as expenses that help you conduct your job even if they are not required.
However, these additional deductions are subject to the 2% limit on itemized deductions—this means you can only deduct the amount that exceeds 2% of your AGI.
If your AGI is $50,000, for instance, you could only deduct expenses that exceed $1,000, even if you are already itemizing deductions for mortgage interest or other reasons.
The same applies for expenses like dues to unions and professional associations or subscriptions to publications.
Rules for deducting expenses for a home office are fairly strict (as well as for equipment like computers). The home office space must be used exclusively for work purposes, which is a tough criterion.
If you take courses that you pay for yourself, whether or not they are required for certification, there are a couple of possibilities for deducting that expense. The compromise tax bill renewed the deduction for tuition and fees for college education for two years, the tax years 2015 and 2016, but did not make it permanent. This tax benefit allows you to deduct up to $4,000 a year (the amount is lower for higher income brackets), and this again is an above-the-line deduction on Schedule A. So not only is it not subject to the 2% rule, it reduces your AGI for other deductions that are itemized.
Another option, which is a permanent part of the tax code, is the Lifetime Learning Credit for 20% of education expenses up to $2,000. The new bill raised the amount to $2,500. 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. You can only take one of these options or the other, not both.
* NOTE: All of the information above is accurate as of December 21, 2015.