In 2018, the Tax Cuts and Jobs Act eliminated a number of tax deductions, including one allowing you to deduct unreimbursed employee expenses. This change came at a bad time, as more Americans than ever are now working from home due to COVID-19.
But while you can't claim a federal tax deduction for the expenses you incur in setting up your home office if you're an employee, some states do allow you to score some tax savings.
Unreimbursed employee expenses are no longer deductible for most
Before the Tax Cuts and Jobs Act, those who itemized were allowed to claim a deduction for a variety of "miscellaneous expenses," as long as the cost of them exceeded 2% of adjusted gross income.
Unreimbursed employee expenses were among those deductible costs and could include things such as home office expenses, work clothing not suitable for everyday wear, automobile expenses, and gift expenses. The key was that you incurred the expense for your job and your employer didn't pay for it.
This deduction was eliminated altogether by the Tax Cuts and Jobs Act in 2018. While business owners and the self-employed retained the ability to deduct for business expenses, ordinary employees who work for others no longer can.
Unfortunately, many people are now incurring big expenses to get set up to work from home, and employers aren't necessarily covering all of them. While this couldn't have been predicted when the tax reform bill passed in 2018, it's bad news for workers who now have to buy all of this equipment without getting a tax break for their spending.
Some states still provide tax savings
There is some good news for those who live in a small number of states. Alabama , Arkansas , California , Hawaii , Minnesota , New York , and Pennsylvania still allow a deduction for unreimbursed employee expenses even though the federal government no longer does.
Although rules do vary within these states, it may be possible not only to deduct for new equipment you buy to work from home, but also to claim a tax deduction for part of your utility bills and a portion of your rent or mortgage interest costs if you've set up a dedicated office in your home.
You generally need to itemize your deductions when you file your state tax returns to take advantage of this option, though, so you'll want to make sure that any deductions you have, including for work-from-home expenses, exceed the standard deduction where you live. Otherwise, you'd get more savings from simply claiming the standard deduction.
But while the federal standard deduction was made much higher by the Tax Cuts and Jobs Act, many states still have relatively low standard deductions, so itemizing can make sense for more people.
Be sure to claim the deduction if you're eligible for it
If you're eligible to claim a deduction for unreimbursed employee expenses, be sure to keep track of anything you spend setting up your home workspace that your employer doesn't reimburse you for. You don't want to miss out on the tax breaks that remain available, even though it's too bad the savings disappeared on the federal level so soon before so many people had to start working from home.