The Tax Cuts and Jobs Act (HR 1, “TCJA”) enacted by Congress contains massive changes in the tax law that affect all Americans. Although most people will see a reduction in their income taxes, some do better than others. Business owners are big winners under the new law, but employees in other peoples’ businesses don’t do as well.
Employees will benefit from the lower income tax rates established by the TCJA. Most will also benefit from a doubling of the standard deduction to $12,000 for singles and $24,000 for marrieds filing jointly. However, millions of employees who itemize will lose valuable tax job-related deductions.
Before 2018, employees who incurred out-of-pocket expenses to perform their jobs were entitled to claim a deduction to the extent such expenses were not reimbursed by the employer. These expenses were an itemized personal deduction claimed on IRS Schedule A; and were deductible only if, and to the extent, they exceeded 2% of the employee’s adjusted gross income (AGI). Deductible employee expenses included:
In 2015, 14.6 million taxpayers claimed unreimbursed employee expenses for a total of more than $96 billion.
The TCJA completely eliminates the deduction for unreimbursed employee expenses for 2018 through 2025. This means, for example, that an employee salesperson who spends $5,000 per year out of his or her own pocket driving for work will not be able to deduct the expense. The deduction is scheduled to return in 2026.
Employees were also allowed to deduct moving expenses incurred to move to a new job if the new workplace was at least 50 miles farther from the taxpayer’s former residence than the former place of work. This was a highly valuable “above the line” deduction not subject to the 2% of AGI limit and that could be taken without itemizing. The TCJA eliminates this deduction during 2018 through 2025, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
The tax law permits employers to provide their employees with certain types of fringe benefits tax-free—that is, employees need not pay any tax on the value of these benefits. The most significant tax-free fringe benefit is health insurance, but there are many others as well. Under prior law, employers were allowed to provide employees:
These benefits are no longer tax free during 2018 through 2025. Your employer can continue to provide them, but you’ll have to pay income tax on their value.
Employers may continue to provide transportation fringe benefits of up to $255 per month tax free to the employees. This includes payment for parking expenses, transit passes, and transportation in a commuter highway vehicle (“vanpooling”). However, employers will no longer be able to deduct the cost of these benefits, making them much more expensive to provide.
You should seek to have your employer reimburse, or directly pay, you for all your work-related expenses instead of paying them out of your own pocket. This type of payment or reimbursment is actually required by some states. For example, California requires employers to reimburse their employees “for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties.” (Calif. Labor Code § 2802).
By far the most common unreimbursed employee expense is job-related mileage (not including personal commuting to and from home to your workplace, which is not deductible). If you drive a lot for work you should seek to have your employer reimburse you since this cost is no longer deductible. These reimbursements would be tax free to you, the employee, so long as you adequately account for your mileage. They are also tax deductible by your employer. Alternatively, your employer could provide you with a company car. This would also be tax free if you only use it for work-related driving (not including personal commuting).
Reimbursement for your work-related mileage is tax free to you (as long as you properly account for your mileage). Thus, if your employer is not legally required to reimburse you for your mileage, it would be worth your while to accept a reduction in salary in return for receiving such reimbursement. For example, if you spend $5,000 per year to drive for work, you could offer to take a $5,000 salary reduction in return for your employer reimbursing you for your mileage. The $5,000 reimbursement is tax free to you and fully deductible by your employer. You end up saving the tax on $5,000 that you otherwise would have had to pay had you taken it in salary instead of a mileage reimbursement.