What are the tax disadvantages an expense allowance?

Question

What are the tax disadvantages of receiving an expense allowance from your employer that you are not required to account for?

Answer 1

Disadvantages:

1. Counts the same as wages and is subject to income tax, Social Security, and Medicare Tax.

2. You can deduct the unreimbursed expenses you paid only if you itemize. Your deductions are limited to 2% of your AGI.

3. If your unreimbursed employee expense deductions are large enough, this could trigger the Alternative Minimum Tax.

4. The additional amount added to your wages may put you in a higher marginal bracket.

5. You may be phased out or disqualified from other deductions or credits (Earned Income Credit, Child Tax Credit, IRA deductibility, itemized deductions, personal exemptions, medical deductions, casualty loss deductions).

Answer 2

I thought some employers try to shift their non-tax deductible expenses to the employees as part of staff cost/remunerations. In my country they are treated as part of the staffs' remuneration and the staff has to report them as their income.

You see, employers for example they are paying for the Company's private car expenses which will not be tax deductible in their books. So they give their staff a fixed allowances for that and it become a staff cost which of course is tax deductible. Whereas, for the staff they receive the allowances as part of their remuneration then they have to report it as income in their income tax submission.

If the allowances are not fixed and its a direct receipts/invoice refund. Then, it is you had paid on behalf for the Company the expenses incurred. Thus, the Company are to book it under their correct nature of the expenses in their books. And in this case, you are not required to account for it.

I hope my answers, give you some understanding why accountants and tax planners are do these and whats cooking. hehee...

Answer 3

It's taxable income to you. Although you can claim unreimbursed employee business expenses for your actual expenses, you have to itemize deductions to get any benefit and it's limited to expenses that exceed 2% of your AGI.