The 2% limit simply means that only the amount of employee business expenses that exceed 2% of a taxpayer's AGI are deductible. In essence, the 2% limit reduces the benefit of the airline crewmember's employee business expense deductions. There is no way to avoid the 2% limit, but some flight crewmembers are affected more than others.
The following describes why:
On Line 10 of IRS Form 2106 (Employee Business Expenses), airline pilots and flight attendants will notice the following statement:
...enter the total on Schedule A (Form 1040), line 21...
The above line on IRS Form 2106 transfers a pilot or flight attendant's unreimbursed airline employee job expenses to IRS Schedule A, Line 21. Simply put, Schedule A has a flight crewmember take the total employee business expenses above plus tax preparation fees.
The AGI is transferred from IRS Form 1040 to Schedule A. The reason it is called the 2% limit is that the airline pilot or flight attendant will multiply his or her AGI by 2%. That value is then compared to the employee business expenses (plus tax preparation fees). Then, only the amount in excess of the the 2% limit is deductible.
Here are a couple of examples of how the 2% limit affects flight crewmember taxes:
Example 1
John is an airline pilot who made $110,000. We'll assume John's AGI (as calculated on IRS Form 1040) was $96,000 because John had some tax credits. Assume John's total employee business expenses from IRS Form 2106 came to $5,500; which included the per diem deduction, other travel expenses, and various airline employment expenses. John also had tax preparation fees that were not included on IRS Form 2106 that added up to $280. On Schedule A, John would enter:
| line 21 (entered from IRS Form 2106) | 5,500 |
| line 22 (tax preparation fees) | 280 |
| line 23 (other expenses) | 0 |
| line 24 Add 21 through 23 | 5,780 |
| line 25 (AGI from IRS Form 1040 Line 38) | 96,000 |
| line 26 (multiply line 25 by 2% - .02) | 1,920 |
| line 27 (subtract line 26 from line 24) | 3,860 |
In the above example, the 2% limit reduces John's employee business expense tax deduction to $3,860 instead of $5,780.
Example 2
Sarah is a flight attendant who made $44,000. We'll assume Sarah's AGI (as calculated on IRS Form 1040) was $38,000 because she had some tax credits. Assume Sarah's total employee business expenses from IRS Form 2106 came to $4,800; which included the per diem deduction, other travel expenses, and various airline employment expenses. Sarah also had tax preparation fees that were not included on IRS Form 2106 that added up to $215. On Schedule A, Sarah would enter:
| line 21 (entered from IRS Form 2106) | 4,800 |
| line 22 (tax preparation fees) | 215 |
| line 23 (other expenses) | 0 |
| line 24 Add 21 through 23 | 5,015 |
| line 25 (AGI from IRS Form 1040 Line 38) | 38,000 |
| line 26 (multiply line 25 by 2% - .02) | 760 |
| line 27 (subtract line 26 from line 24) | 4,255 |
In the above example, the 2% limit reduces Sarah's employee business expense tax deduction to $4,255 instead of $5,015.
One important thing to note from these two examples. Sarah (who had less employee business deductions than John) actually benefited more from the airline employee business expense deduction because the 2% limit hit John harder. In other words, the more a pilot or flight attendant earns, the bigger the impact of the 2% limit.
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