This One Tax Law Change is Bad News for Many Employees

The new tax bill, The Tax Cuts and Jobs Act of 2017 as it is formally known, will result in lower tax bills for most American taxpayers.

However, there is a segment of the workforce that will be negatively impacted by the changes.

If you are an employee who previously took a deduction on your personal tax return for employee business expenses, you may see your tax bill go up starting in 2018.

Read on to find out what the employee business expense deduction is, what is changing and what you can do about it.

Employee Business Expense Deduction

In the past, if you incurred expenses related to your job, you may have been eligible to deduct them on your personal income tax return.

In order to do so, you needed to itemize your deductions.

The amount of employee business expenses, along with your other “miscellaneous itemized deductions” that exceeded 2% of your income could be deducted.

Other miscellaneous itemized deductions included things like tax return preparation fees and financial advisor fees, but employee business expenses were by far the largest.

Example:

You are a single mechanic who made $40,000 in 2017.

You had to spend $4,000 on tools for your job and also paid $200 to have your income tax return prepared.

If you itemized your deductions in 2017, you would have been able to take a miscellaneous itemized deduction of $3,400 ($4,000 + $200 – ($40,000 * 2%)).

There were some special rules for when reimbursements from your employer needed to be included in your income and when you could deduct reimbursed expenses.

However, I will spare you these details.

As you are about to find out, they are no longer relevant.

Miscellaneous Itemized Deductions Eliminated

So, what’s changing with this deduction as a result of the new tax law?

The deduction is being eliminated altogether.

The reality is, this will not impact most taxpayers because they were never able to take advantage of the deduction before.

If you didn’t itemize your deductions in the past or your employee business expenses and other miscellaneous itemized deductions didn’t exceed the 2% threshold, you didn’t receive any benefits from this deduction.

However, certain employees and professions will see a significant negative impact from this change.

Do you work from home and take a home office deduction?

You won’t be able to under the new rules.

If you are a salesperson who travelled a lot of miles for your job and used to take a deduction for them on your personal return, this change will negatively impact you.

Same goes for mechanics, construction workers and other professions that required you to spend a significant amount of your own money for expensive work tools and supplies.

And if you are working in a profession that requires you to purchase special uniforms and you previously deducted them, you won’t be able to going forward.

This change goes into effect for the 2018 tax year and will remain until at least 2025.

What Can You Do About It

If you will be negatively impacted by this change, I have two proposals.

Consider starting a small business.

Even if it is a little side hustle, if it is related to the job you were spending money on, you could instead deduct the expenses from your business income.

There is no 2% limitation when you own a business and you don’t have to itemize your deductions.

And now there is a new deduction for small business owners that makes it even more enticing to start a small business or convert to self-employment.

If the idea of starting a business isn’t practical or doesn’t appeal to you, consider talking to your employer about reimbursing you for the expenses you can no longer deduct going forward.

They are likely benefitting significantly from the new tax law changes, so they should be willing to invest some of these savings into you and other employees.

Next Steps

The new tax bill represents the biggest change in the tax rules in over 30 years.

But I’ve got it covered.

While the bill is over 500 pages long, I summarize the most important changes for middle class taxpayers in this post.

And I’ll be answering your questions on the new rules throughout 2018.

If you have a question about the new tax law, submit it here.