Unreimbursed expenses as an employee

If you work for an employer that you have a moderate level of respect for, then most likely you have gone out-of-pocket to buy something to benefit your company without getting reimbursed.  This can be a range of expenses, from mileage to birthday cakes, but there are certain rules regarding how these unreimbursed expenses can be treated on an employee's individual tax return.  

Before diving into this, there is one big catch.  For an expense to be considered unreimbursed, they must not be eligible for reimbursement or actually reimbursed by the employer.  For example, if your employer has a policy to reimburse an employee for mileage, but you choose not to seek reimbursement, the mileage is not technically an unreimbursed business expense.  Only expenses incurred above and beyond a set reimbursement policy should be considered.

Common expenses that an employee pays out of pocket that could be considered deductible include:

  • Professional dues and licenses
  • Depreciation on a computer you pay for yourself and required for your job
  • Mileage
  • Medical exams required by your employer
  • Necessary tools and supplies used for work
  • Work-related education
  • Specific uniforms or clothing not suitable for everyday use

Of course, there is always a catch.  Here are some expenses that are, by rule, nondeductible:

  • Social club dues
  • Home repairs or rent
  • Lobbying expenses and political contributions
  • Expenses related to attendance of board meetings
  • Lost vacation time

Unreimbursed business expenses are included as a miscellaneous deduction on Schedule A, and they are subject to a 2% of income limitation.  This means that only miscellaneous deductions exceeding 2% of your income will be deductible.  

Forms schedule

I commonly hear clients tell me this time of year "I'm going to get my stuff to you early this year, as soon as possible."  For most people that don't work in the accounting/tax profession (but maybe even for some that do!), taxes are a pain.  People want to get their forms, get their return done, and move on to get ready for spring.  In an effort to anticipate when you will receive certain tax forms, here is a brief synopsis of the filing deadlines for various information returns:

You should receive the following common forms by February 2, 2015:

  • W-2
  • 1099-INT (interest)
  • 1099-DIV (dividends)
  • 1099-MISC (rent, royalties, nonemployee compensation, other misc income)
  • 1099-R (retirement plan distributions)
  • 1099-C (cancellation of debt)
  • 1098 (interest expense)

You should receive the following forms by February 17, 2015:

  • 1099-B (proceeds from broker transactions i.e. investment accounts)
  • 1099-S (proceeds from real estate transactions)

A quick note about amended forms - with the increased regulation of investment companies to report wash sales on Form 1099-B, you will not receive your 1099-B until the middle of February.  This gives the investment company time to see if any sales that occurred in 2014 were subject to a wash sale as a result of a transaction in the first 30 days of 2015.  As a result, it is not uncommon for the investment company to send a 1099-B in the middle of February, and then send an "amended" form later on.  If you have several transactions in your investment account, it might be a good idea to wait until March to file in case you receive an amended form.  

Almost all of the big investment companies will publish a schedule of when their customers can expect to receive forms, like this notice I got from Fidelity a few days ago.  Check with your investment company to see if they have a similar publication.  

One final note, if you are expecting a 1099 from your bank or investment company and do not receive one, don't panic.  Companies are only required to issue a 1099 if your income exceeds certain thresholds.  For example, if your savings account did not earn more than $10 for the year, the bank is not required to send you a 1099.  You can check this quickly by looking at your December statement.  

Going on extension

Including today, there are 22 days left to file a Form 1040 individual tax return.  But what about taxpayers that have complex transactions, are still waiting on some information, or simply "ain't got time fo dat"?

Filing an extension is not a bad thing.  In fact, depending on the complexity of the taxpayer's transactions and the availability of information, filing an extension might be the best option to avoid filing an inaccurate or incomplete tax return.  

What does an extension do?

An individual that needs additional time to file can file Form 4868 by April 15, 2014.  Now let's dispel a few myths about extensions:

Do I get in trouble or does my account get flagged if I file an extension?

No, extensions are perfectly legal and do not cause a taxpayer to get extra special attention from the IRS.  

Do I have to wait for my extension to get accepted?

No, by filing Form 4868 by April 15, the taxpayer's return is automatically extended for 6 months, making the new due date October 15.  However, this is only an extension of time to file, not an extension of time to pay (discussed later).  

What is the benefit?

The benefit of an extension is that the taxpayer will have the time needed to file an accurate and complete return.  Failing to do so could result in penalties, interest, IRS notices and possible IRS examinations.  

Why get an extension?

There are a variety of reasons for taxpayer's to consider getting an extension.  The most common is delays in receiving necessary information to prepare the return.  Taxpayer's that have significant investment accounts might received "amended" 1099's late in tax season, or even during the summer or later in the year.  Taxpayers that have investments in passive activities such as partnerships or S-corporations might not receive their Schedule K-1 until after the filing date.  In these cases, the taxpayer will need to file an extension until they have all the information needed to file an accurate return.  

Taxpayers that have complex transactions might consider filing an extension in order to verify their calculations are correct.  For example, significant sales of assets, inheritance, death, or even moving could be reasons to file an extension.  

Another common reason for taxpayer's to file an extension is time, or lack thereof.  If a taxpayer prepares their own taxes, they might be too busy to devote the attention necessary to file an accurate return.  But if a taxpayer uses a paid preparer and takes their information in during the last week of tax season, be prepared to file an extension.  

Paying with an extension

As mentioned above, filing an extension is an automatic extension of time to file, but not an extension of time to pay.  If the taxpayer expects to owe taxes on their return, they will need to pay those taxes when filing their Form 4868.  The taxpayer must also consider that filing an extension does not exempt them from making quarterly estimated tax payments for the next year, the first one being due on April 15.  

Summertime tax tips

As the summer comes to a close we find ourselves at a transitional point in the year.  The kids are trading in their swimsuits and long days at the pool for backpacks, school supplies, and sack lunches.  I know with the temperatures hanging out in the 90's and 100's it's hard to believe, but fall will be here before you know it.  As this transition in the year happens, it also presents a good opportunity for people to do a little mid-year tax planning.  Below I have listed out a few things to consider as we enter the last five months of the year.

Clean out your closet

Take a look at your closet right now.  Do you see anything hanging up that you haven't worn all summer?  Maybe since last summer?  This is a great chance to go through your closet and bag up any clothes, shoes, and accessories that you feel comfortable passing along to a new owner.  Put all those clothes in a box or a bag and drive them down to your local charity (such as Goodwill) and make your donation.  Don't forget to get a donation receipt, fill out your personal information, list your donated items and assign a conservative value to them.  

Look at your FSA and HSA balances

There are five months left in the year.  But in those five months, you will probably go to the doctor and the dentist at least once, maybe the eye doctor, and possibly have to fill a prescription.  If you have sporty kids at home, you'll probably also been spending some time getting physicals for their various activities.  If you participate in an FSA, HSA, or flex spending account with your employer, this is a good time to see what your balance is, how much you expect to contribute for the remainder of the year, and compare that to your expected expenses.  Remember, in most of these plans you have to use it or lose it.  

Amended tax info

Is there an ominous envelope sitting on your counter at home with the words "IMPORTANT TAX INFORMATION ENCLOSED" that you haven't had a chance to open?  There's a good chance it is from your investment broker with corrected tax reporting information regarding your investments.  Or, it could be from your mortgage company discussing private mortgage insurance premiums.  Either way, you should take a look and discuss with your tax preparer to see if you need to amend your tax return.  

Changes in tax situation

Has 2013 been a year of change for you?  Maybe you bought your first (or third) house, maybe you had your first (or third) kid, or maybe you got nervous and sold a big part of your investment portfolio to avoid the ups and downs of the market.  All of these changes could have an impact on your 2013 tax return which could result in you getting a big refund or having a big balance due in April 2014.  To avoid this, talk with your tax preparer about the changes in your situation, your year-to-date withholdings from your paycheck, and any estimated tax payments you might have already made.  

Get up to date

The "fiscal cliff", "Obamacare", QE3, DOMA...there has been a barrage of news stories about all of these topics and you probably find yourself saying "I feel like this should affect me somehow?"  Well your intuition is correct.  For example, if you expect to make at least $250,000 this year, or you have significant income from investments such as interest, dividends, capital gains, partnerships, etc., or you are a small business owner with employees, then you are right in the crosshairs of several of these changes.  Touch base with your CPA to discuss your situation and consider any planning moves you can make in the closing months of the year.