This morning, Justin Trudeau, the leader of the Canadian Liberal Party, proposed a new tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. for teachers, to help cover out-of-pocket classroom expenses. The proposed credit is largely similar to the educator expense deduction in the U.S. tax code, but differs in a few key regards.
For one thing, Trudeau’s proposed credit is less generous than its American counterpart, but applies to a higher amount of classroom expenses.
In Trudeau’s proposal, teachers would be able to claim a refundable credit for 15% of the cost of classroom items they have purchased – including textbooks, art supplies, laptops, and even motivational stickers. At the 15% rate, teachers would be able to recover 15 cents in taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. savings for each dollar of educational expenses. This credit would apply to up to $1,000 of such expenses each year, leading to a maximum annual credit of $150 Canadian dollars.
On the other hand, the U.S. tax code allows teachers to deduct up to $250 of classroom expenses each year. The tax savings from this deduction depend on which tax bracket a teacher falls into. If a teacher makes the median annual teacher’s salary ($56,383) and falls into the 25% income tax bracket, each dollar of educational expenses that a teacher deducts leads to 25 cents in tax savings. Because of the $250 limit, the maximum amount of tax savings from the educational expense deduction is $62.50 each year (25% x $250).
For teachers with high classroom expenses, Trudeau’s proposal is more favorable than the U.S. educational expense deduction, because applies to over three times as many classroom expenses. However, for teachers with minimal classroom expenses, the U.S. version is more favorable, allowing teachers to reclaim 25 cents of each dollar of classroom expenditures, compared to 15 cents in Trudeau’s proposal.
Another difference between Trudeau’s proposal and the U.S. educator expense deduction is that the first is a refundable tax credit while the second is an above-the-line deduction. The difference is not particularly significant; both policies help teachers recover the costs of out-of-pocket expenses. However, as a deduction, the U.S. provision gives a larger benefit to teachers in higher tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , who save more in taxes for each dollar they deduct.
Trudeau’s announcement is timely, coming at a season when many teachers are preparing for the school year ahead. According to the National Education Association, 97 percent of teachers surveyed spend their own money on classroom supplies, with an average expenditure of $477 a year.
It is unclear whether or not Trudeau’s proposal today was directly influenced by the U.S. educator expense deduction. Prince Edward Island, one of the provinces of Canada, offers a credit for classroom expenses that is designed similarly to Trudeau’s. Unlike in the U.S., the province requires all classroom expenses to be certified by a school principal to qualify for the tax credit.
The U.S. educator expenses deduction has been in the news lately, as one of the tax extenders, over fifty recently expired tax provisions that Congress is currently considering renewing. This year, in addition to considering the renewal of the educator expenses deduction, the Senate Committee on Finance has also proposed modifying the educator expense deduction to index the $250 limit to inflation and allow teachers to deduct professional development expenses.
If the educator expenses deduction does expire, teachers will still be able to deduct much of their classroom spending, as job-related expenses. However, the deduction for job-related expenses is only available to taxpayers who itemize their deductions (usually higher-income taxpayers), and is subject to several limitations.
In theory, employees with necessary job-related expenses should be able to deduct these expenses in full. A teacher making $55,000, whose school pays for all necessary classroom expenses, and a teacher making $56,000, who is expected to purchase $1,000 of necessary classroom items take home the same amount of income and should be subject to the same tax burden. In practice, it is often difficult to determine which job-related expenses are actually necessary, making the deduction for business expenses a well-known source of tax loopholes.
Ideally, American schools would just reimburse teachers for the necessary supplies to operate a classroom – but with tight school budgets across the United States, this may be too much to wish for.
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