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Wednesday, January 11, 2012

The Measly Educator Expense Deduction

A Heritage Foundation study of teacher salaries has provoked quite an outpouring of response.

I would like to address the $250 educator expense tax deduction and some typical hiring practices.

The first $250 a teacher spends on qualifying expenses is an "above the line" deduction, meaning it occurs on the Form 1040 before the line containing either the standard deduction or the itemized deduction. This first $250 deduction is easy for any teacher to take, at least until Congress takes it away. If a teacher spends more than $250 in any calendar year, or the above-the-line deduction disappear, there are two hurdles teachers must surmount in order to claim education expenses.

Any amount exceeding $250 becomes part of the calculation of itemized deductions. The first hurdle is that teachers can itemize only the amount of educator expenses that exceeds 2% of adjusted gross income. For example, suppose the adjusted gross income(AGI) is $25,000. The first $500 is on the teacher. If the educator's deduction is in force, this teacher would need to spend more than $750 before it is even worthwhile to start a Form 2106. If the AGI is $50,000, another $500 would have to be spent before the next dollar can be itemized.

Overcoming the 2% obstacle is just the first step. The itemized deduction hurdle is the second step. Unless itemized deductions exceed standard deductions, teachers get no tax benefit for expenditures greater than $250 (or any expenditure should Congress repeal the educator's deduction). A single teacher's 2012 Schedule A would have to total more than $5,900 in order to deduct even $1 of classroom expenses. Married teachers need more than $11,900 of allowable Schedule A expenses. Unless there is a mortgage, more than likely a teacher will eat their classroom expenses. Contrary to the cited article, the IRS would have no idea how much teachers are spending by looking at tax returns, in part because they have no way of knowing how much educator expense the standard deduction swallowed.

On the other hand, when a teacher purchases their own equipment, they are free to take it with them to the next school. I purchased several sets of Algebra Gear with my own money, and took them with me. If I had to leave them behind because the school had bought them, I would have to ask the new principal to buy them. The answer would likely be NO. I was very glad the Algebra Gear belonged to ME.

Before 2003, most educators got no tax break because the standard deduction swallowed their expenses. The above-the-line deduction was enacted to remedy the situation a little, but it is a far cry from being a reimbursement. The $250 deduction reduces taxable income by $250. A teacher in the 10% tax bracket would save $25 of income tax. A teacher is the 25% tax bracket (they do exist) would save $62.50. In both cases, the savings is peanuts, but the higher-paid teacher get 2.5 times the benefit. Remember too, that the educator expense deduction is perennially on the chopping block, and Congress could eliminate it any year now. Then the 10%-bracket teacher loses even the measly $25 savings.

Private sector workers also have out-of-pocket costs. As an aside, one of my pet peeves are bosses who hire go-fers and expect them to use their own car for the boss's errands without reimbursement. Those expenses are not likely to take the go-fer into Schedule A territory, so the low-paid go-fer eats it. The boss effectively pays an even smaller wage by foisting business expenses onto a low-paid employee.

As far as teacher salaries go, since tax prep was my moonlighting job, I have seen lots of teacher W-2s. Some seemed really low, especially private and charter school teachers. Some seemed really high like the third grade teacher making $70,000 per year and claiming thousands of dollars of furniture purchase every year. Really?

I have linked to the salary schedule of what is probably a median school district. Typically, you put one finger on your education level and one on your years of experience. Your pay should be where your fingers intersect. However, expert out-of-district teaching applicants are virtually unemployable, ostensibly because they are too expensive. Suppose an expert teacher with “Class IV” education and 15 years experience moves into the district and applies for a teaching position. If you think the pay would be $68,985, you would be wrong. See the typical note at the bottom of the schedule, “experience outside Ventura Unified School District is limited to five years.” That expert teacher's salary would be no more than $51,432. The school district would get the expert teacher for a discount of more than 25%. In some districts the pay cut is far larger.

Nevertheless, many expert teachers who change districts for whatever the reason are willing to take the cut. Teaching is their livelihood, their calling. Shortsightedly, school administrators would rather pay a novice an even lower salary than hire a proven expert. As baby boomers begin to retire, some schools have realized the hole they have created in their teaching cadre. They have a lot of novices. They have turned away mid-career teachers. Their veterans are retiring. American society has the education system we are willing to pay for.