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Tax Break for Teachers

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.

Roy Lewis lives in a trailer down by the river and is a motivational speaker when not dealing with tax issues, and he understands that The Motley Fool is all about investors writing for investors. You can take a look at the stocks he owns, as long as you promise not to ask him which stock to buy. He'll be glad to help you compute your gain or loss when you finally sell a stock, though


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