Order Code RS21682
Updated February 25, 2004
CRS Report for Congress
Received through the CRS Web
The Tax Deduction for Classroom Expenses
of Elementary and Secondary
School Teachers
Linda Levine
Specialist in Labor Economics
Domestic Social Policy Division
Summary
An above-the-line deduction for certain classroom expenses paid or incurred during
the school year by eligible elementary and secondary school (K-12) teachers, among
other educators, was authorized in the Job Creation and Worker Assistance Act of 2002
(P.L. 107-147). The classroom expense deduction was made available to eligible
educators for tax years 2002 and 2003. It expired on January 1, 2004. H.R. 3025 and
S. 2050 include extension of the educator classroom expense deduction. Two proposals
that address tax issues beyond education (H.R. 3521 and S. 1896) would extend the
teacher deduction as well. This report describes the classroom expense deduction, its
interaction with other tax provisions, and proposals made concerning the tax benefit
during the 108th Congress. The report will be updated based on legislative activity.
Introduction
As part of P.L. 107-147, Congress initiated a new temporary tax benefit to help K-12
teachers, among other school personnel, defray some of the expenditures they voluntarily
make to enhance the quality of their students’ education. Specifically, eligible educators
employed by public (including charter) and private K-12 schools (as determined by state
law) could claim an above-the-line deduction for certain expenses they paid or incurred
in tax years 2002 and 2003 for use in their classrooms.
This is the first of a number of education-related tax provisions due to expire that
Congress recently expanded or initiated on a temporary basis. Previously, in the
Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16), Congress
created a new higher education deduction through 2005 and expanded two tax-favored
Congressional Research Service ˜ The Library of Congress

---

CRS-2
education savings vehicles through 2010, all with the goal of making K-12 and/or higher
education more affordable for students and their families.1
Characteristics of the Educator Classroom Expense Deduction
Section 62(a)(2)(D) of the Internal Revenue Code (IRC) states that an eligible
educator may, for tax years beginning during 2002 or 2003, subtract from gross income
up to $250 in expenses associated with their purchase of the following items for use by
the educator in the classroom: books; supplies (other than nonathletic supplies for health
or physical education courses); computer equipment, software, and services; other
equipment; and supplementary materials.2 Homeschooling expenses are not mentioned.
These expenses can be deducted as an adjustment to gross income. The “above-the-
line” adjustment can be taken whether or not taxpayers itemize their deductions on
Schedule A of Form 1040.
An eligible educator is defined, in Section 62(d)(1)(A), to be an individual who with
respect to any tax year is a
! K-12 teacher,
! instructor,
! counselor,
! principal, or
! aide
in a school for a minimum of 900 hours in a school year.
The amount of deductible classroom expenses is not limited by the taxpayer’s
income. However, educators must reduce the total amount they have expended on eligible
items by any interest from an Education Savings Bond, or a distribution from a Qualified
Tuition (Section 529) Program or Coverdell Education Savings Account that was
excluded from income. In other words, if educators or members of their tax filing unit
utilize earnings from these savings vehicles to pay tuition or other qualified educational
expenses, only the classroom expenses that exceed the value of these income exclusions
are deductible.
1 For information on these education tax benefits see CRS Report RL31129, Higher Education
Tax Credits and Deduction: An Overview of the Benefits and Their Relationship to Traditional
Student Aid, by Adam Stoll, James B. Stedman, and Linda Levine; CRS Report RL31214, Saving
for College Through Qualified Tuition (Section 529) Programs, by Linda Levine; and CRS
Report RL32155, Tax-Favored Higher Education Savings Benefits and Their Relationship to
Traditional Federal Student Aid, by Linda Levine and James B. Stedman.
2 Classroom expenses that may be deducted also must qualify under Section 162 as trade or
business expenses (i.e., the expenses must be ordinary and necessary but not capital in nature).
Presumably, then, the cost of computers (as well as computer software with a useful life of more
than 1 year) must be capitalized and their depreciation claimed as an educator classroom expense
deduction or as a miscellaneous deduction. The latter tax benefit is addressed later in this report.

---

CRS-3
The allowable amount of expenses would be entered on Form 1040 or Form 1040A
on the line labeled “educator expenses.” Filers of 1040EZ cannot take this adjustment to
income.
There are a few ambiguities concerning the deduction that relate to the hours
requirement. While the educator presumably would claim the deduction for the tax year
(January-December) during which they incurred unreimbursed classroom expenses, they
must have worked 900 hours in a school during the school year (September-June) to be
eligible for the tax benefit. Would an individual who began working as a teacher at the
start of the September 2003-June 2004 school year be able to take the deduction in tax
year 2003 for expenditures made during the first term if they had not yet fulfilled the
hours rule but expected to do so by the end of the school year? The linkage between the
hours rule and the school year suggests another unclear point: does the work time of
eligible school personnel during July and August — as part of summer school or a year-
round schedule, for example — count toward the requirement? A third issue that has
been raised is the meaning of work hours. Although the language in the legislation and
IRC speaks of an eligible educator as someone “in a school for at least 900 hours,” some
have wondered whether the job-related time spent by educators at home could count
toward the hours requirement.
Related Federal Tax Provisions
Trade or Business Expenses. There is a permanent deduction for trade or
business expenses in Section 162 of the IRC. It coexisted with the temporary targeted
deduction and continues to be available to educators.3
Although business expenses have been deductible for many years, concern about
misuse led to the imposition of limitations on their deductibility. Trade or business
expenses generally are a component of miscellaneous itemized deductions. Taxpayers can
only take a deduction to the extent the total of miscellaneous deductions exceeds 2% of
their adjusted gross income (AGI).
Eligible school personnel may want to utilize the Section 162 deduction because it
covers a broader range of expenditures compared to the classroom expense deduction.4
3 Consequently, the addition of the classroom expense deduction has increased the complexity
of the IRC in general and may have made completion of educators’ tax returns more complex and
time-consuming in particular. With regard to the latter point, educators may want to compute
their income tax liability two different ways to determine which deduction is more advantageous
for them — once based upon use of the above-the-line deduction and a second time based upon
use of the Section 162 (business or trade expense) deduction.
4 For example, Section 62(a)(2)(D) requires that items be used in the classroom by the individual
who purchased them. Thus, principals apparently could not take the deduction for books they
bought for the use of teachers in their classrooms. In addition, school counselors or other eligible
educators who subscribe to professional journals or pay dues to professional societies and/or
unions, for example, could apply these expenses toward the trade or business expense deduction
but not the classroom expense deduction. Another example of a non-classroom expense covered
by Section 162 is education related to one’s current job. This last unreimbursed job-related
expense will be discussed later in the report.

---

CRS-4
But, to do so, they must itemize their deductions (i.e., they must have deductible
expenses, such as interest on a home mortgage, that exceed the standard deduction).
Alternatively, the classroom expenses deduction allows educators to avoid having
to meet the 2% of AGI floor on miscellaneous itemized deductions. Most other taxpayers
with earned income who have trade or business expenses must exceed the 2% floor for
miscellaneous expenses in order to take a deduction for job-related expenses.5 In
addition, the miscellaneous itemized deduction for trade or business expenses is not
allowed for purposes of the alternative minimum tax, unlike the treatment of above-the-
line deductions.
The temporary above-the-line deduction also means that eligible educators in higher
income families may not have to subject classroom expenses of $250 or less to the limit
on itemized deductions. Higher income taxpayers must reduce their allowable itemized
deductions by 3% of their income in excess of an inflation-adjusted threshold. The
reduction can never surpass 80% of the allowable deductions, excluding deductions taken
for medical expenses, investment interest, and losses associated with casualty, theft, or
wagering. This reduction is calculated after the 2% floor on miscellaneous itemized
deductions. The limitation on itemized deductions for higher income taxpayers is set to
phase-out effective January 1, 2006, and to be completely eliminated effective January 1,
2010; the elimination of the limitation is set to expire on December 31, 2010, absent
congressional action.
Use of the educator classroom expense deduction also interacts with other tax
provisions through its reduction of AGI. By lowering their AGI, the adjustment to income
enables taxpayers to claim more of those deductions subject to an AGI floor (e.g., medical
and miscellaneous deductions). It also may affect the amount of certain credits (e.g., the
Earned Income Tax Credit).
Contributions to Schools. Educators continue to have another tax benefit
available to them that could improve the quality of students’ education. They, like other
taxpayers, may make charitable contributions to public and private schools of magazine
subscriptions, for example, that the schools then can distribute to those same teachers (or
others) for classroom use.6
Educators and others can make such charitable contributions and avoid the
previously discussed 2% floor applicable to miscellaneous itemized deductions.
Taxpayers must be able to itemize their deductions to take a charitable contribution
deduction, however.
5 Certain occupations that can fully deduct work-related expenses from gross income are
performing artists, and state and local officials working on a fee basis. Individuals with
disabilities also can fully deduct expenses they incur that enable them to work.
6 Section 170(c)(1) of the IRC relates to charitable contributions to public entities, including
public schools. Section 170(c)(2) covers corporations, foundations, and other enterprises
organized and operated exclusively for educational among other specified purposes (e.g., private
schools and certain charitable organizations). Contributions to such education-related firms as
learning centers, tutoring companies, or test preparation enterprises are not deductible expenses.

---

CRS-5
The choice between taking an educator classroom expense deduction and a charitable
contribution deduction for computer expenses has an additional complication. When
computers are taken as an educator expense deduction or a miscellaneous itemized
deduction, taxpayers can consider only the depreciated value as a trade or business
expense. When computers are donated to schools or certain charitable organizations,
however, taxpayers can consider the actual value (e.g., purchase price if new and fair
market value if used) as a charitable deduction.
Legislative Proposals
In its FY2005 budget request, the Administration proposes making the educator
expense deduction permanent and raising the limit to $400. It also has seeks to clarify the
hours rule to specify that the 900 hours must be worked in “a school year ending during
the taxable year.” In addition, the definition of eligible expenses would be expanded to
include training related to a current teaching position. Travel or lodging expenses, and
expenses associated with religious instruction or activities, would not be covered. To
prevent taxpayers from obtaining multiple benefits for the same expenses, expenses used
for the educator classroom expense deduction could not be used toward the miscellaneous
itemized deduction or any other tax benefit, such as the Hope Scholarship and Lifetime
Learning credits.7
The revenue loss associated with the Administration’s proposal is estimated to be
more than $1.2 billion over the FY2005-FY2009 period, including $229 million in
FY2005.8 Data drawn from 2002 income tax returns, the first year of the educator
classroom expense deduction, are not yet available from the Internal Revenue Service.
A few bills related to K-12 educators’ classroom expenditures were proposed during
the first session of the 108th Congress.9 One received floor action. On November 19,
2003, the Tax Relief Extension Act of 2003, H.R. 3521, which deals with expiring tax
provisions generally and trade among other things, was introduced. The House passed
H.R. 3521 on November 20. The legislation would extend the educator classroom
expense deduction to tax years beginning during 2004. The identically titled S. 1896,
which also was introduced on November 19, 2003 and referred to the Committee on
Finance, was more narrowly framed. With regard to the deduction for educators’
7 Section 162 allows taxpayers to deduct unreimbursed education and training expenses if the
training is related to the individual’s current trade or business and neither helps them meet the
minimum requirements of their current fields nor prepares them to enter new fields. Taxpayers
who take undergraduate and graduate courses (including one or more job skills classes) at an
eligible institution of higher education can utilize the Lifetime Learning Credit (or the Higher
Education Deduction through 2005) to cover tuition and required fees. These and other benefits
associated with qualified educational expenses must be coordinated with one another when filing
one’s federal income tax return.
8 U.S. Department of the Treasury, General Explanations of the Administration’s Fiscal Year
2005 Revenue Proposals, Feb. 2004.
9 H.R. 3025 would extend the deduction through Dec. 31, 2008. H.R. 785 and S. 695 would
broaden eligible expenses to include professional development courses taken by the educator that
are related to the subjects they teach and the students they instruct. The former would increase
the maximum to $400; the latter, to $500.

---

CRS-6
classroom expenses, the bill aims to clarify the relationship between the tax year and
school year: it would apply the deduction to tax years beginning during 2002, 2003, “and
the period beginning after December 31, 2003, and before July 1, 2004,” and states that
the $250 limit on expenses is “for each taxable year or $125 for such period.” Thus, it
would extend the deduction through July 1, 2004 and limit deductible expenditures during
the January 1, 2004-July 1, 2004 period to $125.
Thus far in the second session of the 108th Congress, it appears that one bill (S. 2050)
has been introduced concerning the deduction. It would make the classroom expense
deduction permanent and retroactive to its December 31, 2003 expiration date. In
addition, the bill would repeal the applicability of the sunset provisions in the Economic
Growth and Tax Relief Reconciliation Act of 2001 to some of the education tax benefits
included in that Act thereby maintaining enhancements to benefits slated to end after
December 31, 2010 (e.g., expanding Coverdell Education Savings Accounts to families’
K-12 expenses and making qualified withdrawals from Section 529 Qualified Tuition
Programs tax-free).

---