Schoolteachers’ deduction no longer tardy

The above-the-line deduction for certain classroom expenses of elementary and secondary schoolteachers was added to the Code (Sec. 62(a)(2)(D)) as a temporary provision in 2002 and was renewed six times as an “extender” item—each time retroactively—until the Protecting Americans From Tax Hikes (PATH) Act of 2015 (part of the Consolidated Appropriations Act, 2016, P.L. 114-113) made it permanent for tax years 2015 and following. For tax years 2016 and following, the PATH Act also expanded the deduction to cover professional development expenditures and indexed its $250 maximum amount for inflation. Thus, qualifying educators can now count on the deduction each year and potentially realize a greater benefit from it than previously.

QUALIFIED EXPENSES

The deduction is for otherwise allowable trade or business expenses paid or incurred by an eligible educator in connection with books, supplies, computer equipment (including related software and services), and other supplementary materials used by the eligible educator in the classroom. Nonathletic supplies used in a health or physical education class or costs associated with homeschooling are not considered qualified expenses (Sec. 62(a)(2)(D)(ii) and IRS Publication 529, Miscellaneous Deductions).

Sec. 62(a)(2)(D)(i) was also newly added to cover expenses paid or incurred by reason of the taxpayer’s participation in professional development courses that relate to “the curriculum in which the educator provides instruction or to the students for which the educator provides instruction.” Expenses incurred to meet the minimum requirements of the educator’s present job or to qualify for a new profession may not be deductible (see IRS Publication 970, Tax Benefits for Education).

The IRS further recommends that educators keep all receipts and other documentation to substantiate their qualified expenses (News Release IR-2007-158).

ELIGIBLE EDUCATOR

An eligible educator must be a kindergarten through 12th-grade “teacher, instructor, counselor, principal, or aide” in a public or private elementary or secondary school, as defined by applicable state law (Sec. 62(d)(1)). Married taxpayers filing jointly who are both eligible educators may each claim up to the maximum deduction (i.e., no more than $250 per spouse).

A taxpayer must also be an eligible educator for at least 900 hours during a school year (Sec. 62(d)(1)(A)). However, guidance is lacking on how to coordinate the school year with the tax year in certain situations. For instance, it is unclear whether the 900 hours can include summer classes, which are generally not considered part of a school year. In addition, many schools do not have a traditional school year but follow some form of year-round attendance plan.

Also, it is not clear that otherwise eligible educators can take the deduction in the year they begin teaching but have not yet worked 900 hours by Dec. 31 (as would be likely for a teacher starting at the beginning of the school year in August or September), even if they expect to meet the requirement by the end of the school year.

CALCULATING THE DEDUCTION

The deduction for educator expenses is only allowed to the extent it exceeds the amount of excludable U.S. Series EE and I savings bond interest from Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989; nontaxable qualified state tuition program earnings; and nontaxable earnings from Coverdell education savings accounts (Sec. 62(d)(2); IRS Publication 529). The amount is reduced by any employer reimbursements that were not reported to the taxpayer on Form W-2 (Box 1).

Any unreimbursed educator expenses that exceed the $250 ceiling may be claimed as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income (AGI) floor, but they are an adjustment in calculating alternative minimum tax.

Educators whose unreimbursed educator expenses exceed the maximum allowable above-the-line deduction for the tax year may want to consider making a charitable contribution to their school under Sec. 170 to avoid the 2%-of-AGI floor for miscellaneous itemized deductions. However, as with miscellaneous itemized deductions, any benefit from this option depends on the taxpayer’s claiming itemized deductions rather than the standard deduction, and the taxpayer will need to meet the Sec. 170 substantiation requirements.

Despite such concerns and considerations, the schoolteacher expense deduction is often a quick and effective way to realize a tax benefit from the out-of-pocket expenditures many teachers make, one that reduces AGI and thus provides at least a small advantage with respect to phaseouts and other AGI-dependent calculations. Moreover, now that the PATH Act has made the deduction permanent, eligible educators can save their qualifying expense documentation throughout each school year, knowing the effort will not have been in vain.

John W. McKinley (jwm336@cornell.edu) is a lecturer in accounting and taxation at Cornell University in Ithaca, N.Y., where Do Yoon (Harold) Kim (dk472@cornell.edu) is a student and CPA candidate.

To comment on this article or to suggest an idea for another article, contact Paul Bonner, senior editor, at pbonner@aicpa.org or 919-402-4434.