Search This Blog

Wednesday, January 28, 2009

Poor Use of the Tax Law and Lack of Care of Teachers

If you incur work-related expenses that your employer does not reimburse you for and they are proper employee business deductions, you can deduct them on your return if you itemize your deductions. The Tax Reform Act of 1986 limited this deduction further by requiring "miscellaneous itemized deductions" (such as unreimbursed employee business expenses) to only be deducted as itemized deductions to the extent they exceed 2% of your adjusted gross income (AGI).

The Job Creation & Worker Assistance Act of 2003 (PL 107-147) modified the above rule for K-12 "eligible educators" (teachers, principals, counselors, and aides in a school for at least 900 hours during a school year). Under the new rule (IRC Section 62(a)(2)(D)), these educators may deduct up to $250 of their work-related education expenditures "above the line" - meaning they may deduct them even if they do not itemize and regardless of their AGI level. This was a temporary, 2-year provision. It was subsequently renewed 3 times and now expires 12/31/09. The most recent extension for 2008 and 2009 was enacted on 10/3/08 (Emergency Economic Stabilization Act of 2008 (PL 110-343)). Some educators may not have kept their expense records for spring and fall 2008 since the provision had expired 12/31/07. [Recordkeeping is important - see these two IRS announcements: 2005 and 2007]

A current proposal - H.R. 28 (111th Congress), proposes to increase the above-the-line educator expense deduction to $500 and extend it through 2011.

As evidenced by the name of this blog, I hope that actions will be taken to move tax systems into the 21st century. Hopefully any such efforts will also consider what is the tax law supposed to do and not do (something we often lost sight of in the 20th century). I do not believe the tax law is to be used to either (1) address a failure of states and school districts to adequately fund K-12 classrooms or (2) allow for an odd way to get federal dollars into select classrooms (ones where the teacher is willing to spend his/her own money). The special deduction though, is helping teachers to fund these expenses and likely discourages states and schools from worrying too much about the reality that teachers are paying for what might be basic classroom items.

The existing $250 above-the-line deduction for eligible K-12 educators was likely created to help K-12 teachers since people knew that with budget cuts, many teachers were coming out of pocket to ensure that they could effectively do their work and because of their dedication to their students. But ....

  • The tax benefit continues to be small and temporary.
  • The longer the special rule exists (even if temporary), the greater the likelihood that states and school districts will forget that THEY are supposed to be funding these classroom expenses - not the teachers! Also - I would not be surprised if schools might even be encouraging teachers to spend up to the $250 to help the school.
  • While the above-the-line deduction is better than the normal rule for miscellaneous itemized deductions, it is still not ideal for teachers who increasingly need to cover employer costs in order to do their job effectively. The teachers are still out-of-pocket - often for basic teaching materials. The deduction just reduces the outlay by their marginal tax rate (if the teacher is in a 20% tax bracket and spends $250, the tax benefit brings that cost down to $200). Often, this tax break is labeled as a tax credit (even by one of its congressional sponsors - see the title of this press release!), but that is incorrect. A credit is a dollar-for-dollar reduction in your taxes (a nice tax break!) which a deduction just saves you your tax rate times the expenditures ($50 in the earlier example).
  • Think about it... How many employees other than teachers are expected to buy supplies to do their job and help students learn? How many CPAs and attorneys working in firms have to buy their own paper and computers to do their work? How many people working in retail have to buy their own cash register and perhaps incur costs to help customers get their purchases home?
  • What about fairness to students? Not all teachers can afford to purchase classroom supplies with their own funds. Students of teachers who can afford the expense reap the benefit. A Montana school teacher testifying on behalf of NEA before a Senate committee in 2007 noted: "In my school, teachers' personal expenditures range from a low of $500 a year (a new teacher with a family to support on the low Montana starting salary) to my high of over $2,000." She says she had averaged $2,200 per year! Congress should not be encouraging this inequity.
  • And think about - what message is really being sent with a proposal to double the deduction (I think the message is - "the government is going to cut education more so we're counting on you teachers to spend even more of your personal funds to get your classroom ready and here is a bigger deduction to help you")!

I realize that this provision is a good deal given the alternative and the reality that state and school district budgets don't seem to be covering sufficient classroom expenses.

But - how about these alternatives:

  1. Until state budgets are designed to properly fund education, if the federal government really wants to help K-12 educators directly (rather than giving the money directly to the states or schools), change the deduction to a refundable tax credit. With a refundable credit, if the educator uses his/her own money to buy classroom supplies up to $250, they'd get a $250 benefit/reimbursement (of course, this would likely really lead schools to tell all eligible employees to spend $250 to help the school - free money from the federal government!)
  2. Extend the deduction through 2012 with the caveat that it WILL NOT be extended beyond that.* The extension would also include a mandate that the federal government and states must find an alternative way to spend this money so it can be done more effectively - so teachers do not have to purchase basic educational supplies. This would be a more effective way to use these federal dollars (about $200 million annually). When government funds are in many different budgets or accounts, it is hard to see how much is actually being spent on something and it is difficult to generate purchasing efficiencies. In addition, when too many people have control over spending it really means that no one is overseeing it properly. There is a "cost"** to the federal government of the educator deduction, but it is not likely to be counted with other federal funding of education. Theoretically, all of these dollars could be spent more effectively by having one responsible party, such as the state, manage the spending.

* Even without the special deduction, teachers could still deduct unreimbursed employee business expenses the same way other employees can, but they would not have many such expenses because the school would pay for classroom expenses directly.

** Per the Joint Committee on Taxation's 2008 Federal Tax Expenditure report (p. 54), the "cost" to the federal government of the above-the-line deduction for teacher classroom expenses was $200 million for fiscal year 2008.

What do you think?


Walters and Ward said...

This is an interesting post. There are California probate lawyers that can answer any questions on the subject matter.

san diego tax accountant said...

Keep up the good work!! I am really impressed with your work!