Back-to-school savings aren't only found in your
local department store. For teachers (and other education
professionals) at elementary and secondary schools, a new tax break was
recently created. Let's take a few minutes to look at this little legal
loophole.
According to a recent study by the National Education Association,
the average K–12 teacher spends about $400 annually out of her own
pocket for classroom supplies. In the past, many teachers would take
those expenses as deductions on their tax returns as "miscellaneous
itemized deductions."
That was fine for those teachers who could itemize their deductions.
Well... maybe fine. Miscellaneous itemized deductions are only
allowable if they exceed 2% of adjusted gross income (AGI). So, in many
cases, the teachers who were shelling out the bucks for classroom
supplies were receiving no tax savings for these expenses.
But the Job Creation and Worker Assistance Act of 2002 provides some
limited relief. In this law, there is a new $250 above-the-line
deduction for qualifying expenses paid by an eligible educator in tax
years beginning in 2002 and 2003. Note that this is an "above-the-line"
deduction, which means that you don't have to itemize your deductions
in order to claim this tax break for 2003. So many teachers who found
themselves with no tax deductions in the past will find some help from
Uncle Sam in 2003.
Eligible educator
Who exactly
is an "eligible educator"? The new law says that such a person is a
K-12 teacher, instructor, counselor, principal, or aide in a school for
at least 900 hours during a school year. Note that the definition of an
educator is broad, so don't give up on the deduction just because you
might not be a frontline teacher.
Eligible expenses
These include
books, supplies (other than non-athletic supplies used for courses of
instruction in health or physical education), computer hardware and
related software and services, other equipment, and supplementary
materials used by the teacher in the classroom. While these expenses
are required to be "ordinary and necessary," you can see that the list
of possible expenses is very broad.
Eligible schools
In general,
you'll have to look to state law to see if your school qualifies.
Obviously, public schools qualify without question. But how about
private schools? So-called charter schools? Homeschooling? That will
depend on your state law. The school in question must be one that,
according to state law, provides K-12 elementary or secondary
education. With this definition, a school that is something other than
a public school might just qualify under your state statutes. So, just
because you work for a school other than a public school, don't think
that the tax deduction doesn't necessarily apply to you.
Excess expenses
What if you
find that you spend more than $250 for classroom and other related
education supplies? Does that mean that the balance of your deduction
is lost? Not necessarily. You can still claim the excess expenses as a
miscellaneous itemized deduction. You'll still have to overcome the 2%
AGI limitation. And you'll then have to itemize your deductions. So
it's possible that you'll win the battle and lose the war. But at least
you'll be assured a deduction of $250 where there was once nothing.
Income limitations
With
virtually all tax breaks, there are certain income limitations. Go over
those limitations and you lose the deduction or credit. But not for
this deduction. There are no income limitations relative to this
deduction. This means that as long as you have incurred the eligible
expenses, and you otherwise qualify for this deduction, it is available
to you regardless of how much other income you may have from any other
source. And that would include income generated by your spouse when
filing a joint return. So this deduction is fair game for virtually any
eligible educators.
Records to keep
The IRS has
also pointed out that in order to claim the deduction, you must have
proper documentation. It suggests that if you're planning on
taking this deduction, you should set up a folder or envelope to hold
your receipts for your unreimbursed school-related expenses. On each
receipt, you should make a notation of the date, the amount of the
expense, and the purpose of the expense, i.e., how it was related to
your school duties. So, if you're planning on claiming this deduction,
make sure to also retain your receipts. There is some misinformation
out there that this $250 deduction is "automatic" for all teachers.
That's simply not true. If you want the deduction, you'll have to play
the game and keep your receipts.
All good things must end
As the
old saw points out, this deduction is scheduled to expire after 2003.
That means that qualifying expenses are eligible for the deduction if
incurred in 2002 and 2003. But this provision of the law will expire in
2004. My guess is that Congress will continue to renew this tax break
when it's set to expire at the end of 2003, but it's no certainty.
Bigger than a breadbox?
Some
may say that $250 is just a drop in the bucket. While the deduction
certainly isn't large, it'll still save you a few tax dollars that you
would not otherwise have received. Heck, at the 27% bracket, a $250
deduction will save you $67.50. It won't put the down payment on your
new Porsche, but it'll be at least a small reward for money that you,
as a concerned educator, will likely spend anyway. But regardless of
the size of the tax break, it's something that you and your educator
friends and co-workers should be aware of.
Related Links:
10 Ways to Cut Your Taxes
If you like the way Roy Lewis simplifies confusing tax issues, check out his just-published book, The Motley Fool's Investment Tax Guide 2002: Smart Tax Strategies for Investors. This handy 360+ page guide covers just about every tax aspect of a typical Fool's life: investing, marriage, children, education, homes, home offices, retirement accounts, medical expenses, and much more.)
August 15, 2003
