February 24, 2003

Teachers' Classroom Expense Deduction

Submitted by Mike Goodfellow and Tim Madden

Teachers and professional educators get a new tax break for 2002 and 2003 and, while it's only temporary, it will ease the pain of many out-of-pocket classroom expenses. The new economic stimulus package, recently signed into law by the President, allows teachers and education professionals to deduct unreimbursed classroom expenses. Next time you spend your money to buy supplies or equipment, up to $250 will be deductible. The deduction is above-the-line (deductible even if you don't itemize) so it is valuable and it covers a lot of expenses, not just paper and pens. Educator is defined as "Instructor, counselor. principal or aide who works in a K-12 school for at least 900 hours during a school year. (IRC Sec 62(d)(1)(A))

The new law gives you an above-the-line deduction up to $250 each year for certain expenses, which must have been for:
*Supplies-besides non-athletic supplies for health or physical education courses;
*Computer equipment-including software and services that are related;
*Other equipment and supplementary materials that are used in the classroom.

The expense has to be one that can otherwise be deducted as a trade or business expense--i.e., an ordinary and necessary expense that is paid or incurred during the tax year for the carrying on of any trade or business-under Code Sec. 162.

The new law specifies that educators who qualify to take the deduction include kindergarten through twelfth grade:
*Counselors; or
*Principals in a school for a minimum of 900 hours in the course of a school year (under the new law, a "school" is defined to be any school providing elementary or secondary education, as determined under state law).

The deduction is applicable for taxable years that start after December 31, 2001 and before January 1, 2004. That means you'll be taking the deduction for your out-of-pocket expenses this year, 2002, and next year, 2003.

If you are a qualifying educator, you should also note that the allowed deduction appears to be a very broad one. Maintain all receipts for your expenses that can be deducted under the new law. This way, should there be any need to verify these expenses (for instance, in an audit situation or for employer-verification), they will be on-hand.

Also, the new law does not specifically mention certain issues. For instance, although it defines categories of qualifying educators, it does not specifically mention substitute teachers or whether it covers summer school expenses. The IRS likely will clarify any ambiguities in more guidance.