Travel Expenses

You can deduct expenses for travel, meals (see 50% Limit on Meals, later), and lodging if:

1. You travel overnight to obtain qualified education, and
2. The main purpose of the trip is to attend a work-related course or seminar.

Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. For more information, see chapter 28.

You cannot deduct expenses for personal activities, such as sightseeing, visiting, or entertaining.

Mainly personal travel.   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities.

Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. An important factor is the comparison of time spent on personal activities with time spent on educational activities. If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location.

Example 1.   John works in Newark, New Jersey. He traveled to Chicago to take a deductible 1-week course at the request of his employer. His main reason for going to Chicago was to take the course.

While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day.

Since the trip was mainly for business, he can deduct his round-trip airfare to Chicago. He cannot deduct his transportation expenses of going to Pleasantville. He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities.

Example 2.   Dave works in Nashville and recently traveled to California to take a 2-week seminar. The seminar is qualifying education.

While there, he spent an extra 8 weeks on personal activities. The facts, including the extra 8-week stay, show that his main purpose was to take a vacation.

He cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar.

Cruises and conventions.   Certain cruises and conventions offer seminars or courses as part of their itinerary. Even if the seminars or courses are work related, your deduction for travel may be limited. This applies to:

1. Travel by ocean liner, cruise ship, or other form of luxury water transportation, and
2. Conventions outside the North American area.

For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in Publication 463.

50% Limit on Meals

You can deduct only 50% of the cost of your qualifying meals while traveling away from home to obtain education. You cannot have been reimbursed for the meals.

Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit.

Travel as Education

You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business.

Example.   You are a French language teacher. While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. You chose your itinerary and most of your activities to improve your French language skills. You cannot deduct your travel expenses as educational expenses. This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities.

Expenses Relating to Tax-Exempt and Excluded Income

Some educational assistance you receive may be tax-exempt or excluded from your income. Since you do not pay tax on this income, you may not be able to deduct the related expenses. Examples of tax-exempt or excluded income include scholarships, veterans' educational assistance, and the Education Savings Bond Program. If you received assistance from any of these sources, see Expenses Relating to Tax-Exempt and Excluded Income in Publication 508.

Employer-Provided Educational Assistance

If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. This also means that you do not have to include the benefits on your income tax return.

You must reduce your deductible educational expenses by the amount of any tax-free educational assistance benefits you received for those expenses.

Educational assistance program.   To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Educational assistance.   Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. For courses beginning on or after January 1, 2002, the payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses.

Educational assistance benefits do not include payments for the following items.

1. Meals, lodging, transportation, or tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
2. Education involving sports, games, or hobbies unless the education has a reasonable relationship to the business of your employer or is required as part of a degree program.

Benefit over $5,250.   If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (box 1 of your Form W-2) the amount you must include in income.

Working condition fringe benefit.   However, if the payments also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense.

Where To Deduct Expenses

Self-employed persons and employees report business expenses differently.

The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense.

Self-Employed Persons

If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (Schedule C, C-EZ, or F). If your educational expenses include expenses for a car or truck, travel, or meals, report them the same way you report other business expenses for those items. See the instructions for the form you file for information on how to complete it.

Employees

If you are an employee, you can deduct the cost of qualifying education only if you were not reimbursed by your employer or if the costs exceeded your reimbursement. (Amounts your employer paid under a nonaccountable plan and included in box 1 of your Form W-2 are not considered reimbursements.) How you treat any reimbursement you receive depends on the type of reimbursement arrangement and the amount of the reimbursement. For information on how to report your reimbursement, see chapter 28.

In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on line 20 of Schedule A (Form 1040). (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later in this chapter.) This deduction is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions.

Form 2106 or 2106-EZ.   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or Form 2106-EZ.

Form not required.   Do not complete either Form 2106 or Form 2106-EZ if:

• You were not reimbursed for any of your expenses, and
• You are not claiming travel, transportation, meal, or entertainment expenses.

If you meet both of these requirements, enter the expenses directly on line 20 of Schedule A (Form 1040). (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later.)

Using Form 2106-EZ.   This form is shorter and easier to use than Form 2106. Generally you can use this form if:

• You were not reimbursed for any of your expenses, and
• You are using the standard mileage rate if you are claiming vehicle expenses.

If you do not meet both of these requirements, use Form 2106.

Performing artists and fee-basis officials.   If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction.

For more information on qualified performing artists and fee-basis officials, see chapter 28.

Impairment-related work expenses.   If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on line 27 of Schedule A (Form 1040). They are not subject to the 2%-of- adjusted-gross-income limit.

For more information on impairment-related work expenses, see chapter 28.

Recordkeeping

You must keep records as proof of any deduction claimed on your tax return. Generally, you should keep your records for 3 years from the date of filing the return and claiming the deduction.

For specific information about keeping records of business expenses, see Recordkeeping in chapter 28.

Miscellaneous Deductions

Important Reminder

Limit on itemized deductions.   For 2002, if your adjusted gross income is more than $137,300 ($68,650 if you are married filing separately), you may have to reduce the amount of certain itemized deductions, including most miscellaneous deductions.

Introduction

This chapter explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. This chapter covers the following topics.

• Deductions subject to the 2% limit.
• Deductions not subject to the 2% limit.
• Expenses you cannot deduct.

You must keep records to verify your deductions. You should keep receipts, canceled checks, financial account statements, and other documentary evidence. For more information on recordkeeping, get Publication 552, Recordkeeping for Individuals.

Useful Items You may want to see:

Publication

• 529   Miscellaneous Deductions
• 535   Business Expenses
• 587   Business Use of Your Home (Including Use by Day-Care Providers)
• 946   How To Depreciate Property

Form (and Instructions)

• 2106   Employee Business Expenses
• 2106-EZ   Unreimbursed Employee Business Expenses

Deductions Subject to the 2% Limit

You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). You can claim the amount of expenses that is more than 2% of your adjusted gross income. You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Your adjusted gross income is the amount on line 36, Form 1040.

Generally, you apply the 2% limit after you apply any other deduction limit. For example, you apply the 50% (or 65%) limit on business-related meals and entertainment (discussed in chapter 28) before you apply the 2% limit.

Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A.

1. Unreimbursed employee expenses (line 20).
2. Tax preparation fees (line 21).
3. Other expenses (line 22).

Impairment-related work expenses.   If you have a physical or mental disability, certain expenses you incur that allow you to work may not be subject to the 2% limit. See Impairment-Related Work Expenses under Deductions Not Subject to the 2% Limit, later.

Performing artists.   If you are a qualified performing artist, you may be able to deduct your employee business expenses as an adjustment to income rather than as a miscellaneous itemized deduction. See Special Rules in chapter 28 if you need more information about this exception.

State and local government officials paid on a fee basis.   If you performed services as an employee of a state or local government and you were paid in whole or in part on a fee basis, you can claim your trade or business expenses in performing those services as an adjustment to income, rather than as a miscellaneous deduction. See Officials Paid on a Fee Basis under Deductions Not Subject to the 2% Limit, later.

Unreimbursed Employee Expenses (Line 20)

You can deduct only unreimbursed employee expenses that are:

1. Paid or incurred during your tax year,
2. For carrying on your trade or business of being an employee, and
3. Ordinary and necessary.

An expense is ordinary if it is common and accepted in your type of trade or business. An expense is necessary if it is appropriate and helpful to your trade or business.

Examples of unreimbursed employee expenses are listed next. The list is followed by discussions of additional unreimbursed employee expenses.

• Business bad debt of an employee.
• Education that is work related. (See chapter 29.)
• Legal fees related to your job.
• Licenses and regulatory fees.
• Malpractice insurance premiums.
• Medical examinations required by an employer.
• Occupational taxes.
• Passport for a business trip.
• Subscriptions to professional journals and trade magazines related to your work.
• Travel, transportation, entertainment, gift, and car expenses related to your work. (See chapter 28.)

Business Liability Insurance

You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job.

Damages for Breach of Employment Contract

If you break an employment contract, you can deduct damages you pay your former employer if the damages are attributable to the pay you received from that employer.

Depreciation on Computers or Cellular Telephones

You can claim a depreciation deduction for a computer or cellular telephone that you use in your work as an employee if its use is:

1. For the convenience of your employer, and
2. Required as a condition of your employment.

For more information about the rules and exceptions to the rules affecting the allowable deductions for a home computer or cellular telephone, see Publication 529.

Dues to Chambers of Commerce and Professional Societies

You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. Similar organizations include:

• Boards of trade,
• Business leagues,
• Civic or public service organizations,
• Real estate boards, and
• Trade associations.

You cannot deduct dues paid to an organization if one of its main purposes is to:

1. Conduct entertainment activities for members or their guests, or
2. Provide members or their guests with access to entertainment facilities.

Dues paid to airline, hotel, and luncheon clubs are not deductible. See Club Dues under Nondeductible Expenses, later.

Lobbying and political activities.   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. See Dues used for lobbying under Lobbying Expenses, later.

Home Office

If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home.

You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:

1. As your principal place of business for any trade or business,
2. As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or
3. In the case of a separate structure not attached to your home, in connection with your trade or business.

The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. Get Publication 587 for more detailed information and a worksheet.

Job Search Expenses

You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job.

You cannot deduct job search expenses if:

1. You are looking for a job in a new occupation,
2. There was a substantial break between the ending of your last job and your looking for a new one, or
3. You are looking for a job for the first time.

Employment and outplacement agency fees.   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation.

Employer pays you back.   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. (See Recoveries in chapter 13.)

Employer pays the employment agency.   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income.

Résumé.   You can deduct amounts you spend for typing, printing, and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation.

Travel and transportation expenses.   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. You can deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area.

You may choose to use the standard mileage rate to figure your car expenses. The standard mileage rate for 2002 is 36½ cents per mile. See chapter 28 for more information.

Licenses and Regulatory Fees

You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession.

Occupational Taxes

You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return.

Repayment of Income Aid Payment

An income aid payment is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment.

Research Expenses of a College Professor

If you are a college professor, you can deduct research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to the field of your teaching duties. You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. However, you cannot deduct the cost of travel as a form of education.

Tools Used in Your Work

Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. You can depreciate the cost of tools that have a useful life substantially beyond the tax year. For more information about depreciation, get Publication 946.

Union Dues and Expenses

You can deduct dues and initiation fees you pay for union membership.

You can also deduct assessments for benefit payments to unemployed union members. However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions.

You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. See Lobbying Expenses under Nondeductible Expenses, later.

Work Clothes and Uniforms

You can deduct the cost and upkeep of work clothes if the following two requirements are met.

1. You must wear them as a condition of your employment.
2. The clothes are not suitable for everyday wear.

It is not enough that you wear distinctive clothing. The clothing must be specifically required by your employer. Nor is it enough that you do not, in fact, wear your work clothes away from work. The clothing must not be suitable for taking the place of your regular clothing.

Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.).

Musicians and entertainers can deduct the cost of theatrical clothing and accessories if they are not suitable for everyday wear.

However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible.

Protective clothing.   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves.

Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers.

Military uniforms.   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses.

If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive.

You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school.

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