Work-Related Reimbursements and the Suspension of Miscellaneous Itemized Deductions

The Tax Cuts and Jobs Act (TCJA) has brought significant changes to the taxation of miscellaneous itemized deductions, effective for tax years after 2017 and before 2026. One important consequence is that many employees are no longer able to claim work-related expenses as deductions on their personal income tax returns.

Prior to the TCJA, employers could reimburse employees for certain business expenses under an 'accountable plan,' which allowed both the employer and employee to avoid taxation. This arrangement relieved employers of their withholding obligations and FICA liability, while also providing a benefit to employees in the form of reduced taxable income.

In response to the suspension of miscellaneous itemized deductions, some employers may wish to reconsider their reimbursement policies to cover all or a portion of certain expenses previously borne by employees. By doing so, they can help alleviate employee dissatisfaction over the loss of this deduction and encourage employees to continue making expenditures that benefit the employer.

For tax years prior to 2018, the after-tax cost of work-related expenses could sometimes be diminished by claiming those expenses as miscellaneous itemized deductions under Code §67. However, these deductions were limited to expenses that exceeded 2% of an individual's adjusted gross income and satisfied any expense-specific conditions.

In summary, while the suspension of miscellaneous itemized deductions has reduced the ability of employees to claim work-related expenses on their personal income tax returns, employers may still be able to provide benefits to employees by offering reimbursement for certain expenses. Employers who do not currently offer reimbursement for business expenses may wish to reconsider this policy in order to maintain employee satisfaction and reduce the after-tax cost of work-related expenses.

Miscellaneous itemized deductions