Read this before you file your tax return. We’ll help you claim your educator deductions so you can get back as much money as possible.
Two years ago the prospect of going over the fiscal cliff kept everybody on tenterhooks about what their tax deductions would be. A last-minute tax bill preserved many of the tax benefits NEA members have come to rely on, but many were extended for the 2012 and 2013 tax years only.
“We had that same suspense again this year,” says Jackie Perlman, principal tax research analyst at H&R Block’s Tax Institute.
Congress did act in the final days of 2014 to pass the so-called tax extenders, but only retroactive to the 2014 tax year. This covered some 50 expired tax benefits, including a few in particular that concern educators, like the $250 above-the-line deduction for classroom supplies and the tuition and fees deduction.
The $250 deduction for classroom supplies, which was renewed for 2014, is a particularly advantageous deduction 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).
One other important fix in the tax bill from two years ago was the removal of the 60-month limit on deducting the interest on student loans, and that was a permanent fix.
Educators may also benefit from the state income tax deduction or other expired breaks that were 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.
Since this tax extender bill only covers 2014, the whole package will have to be considered again for the tax period that started Jan. 1 of this year . To the extent that the benefits are renewed, they will probably be made retroactive to the beginning of the tax year. So once again, Perlman suggests, educators will have to keep an eye out for additional extensions or changes.
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 was extended for 2014. 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 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 tax extender bill renewed the deduction for tuition and fees for college education for 2014. 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. 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 in this article is accurate as of January 2015.