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2% Limit

A common term used in trucker tax preparation is the 2% limit.  This term means that only the amount of a truck driver's business expenses that exceed 2% of a his or her AGI are deductible.  The 2% limit effectivley reduces the tax benefit of the trucker's employee business expenses.  While the 2% limit cannot be avoided, some truck drivers are affected more than others.

The following describes why:

If you look on Line 10 of IRS Form 2106 (Employee Business Expenses), you will notice the following statement:

...enter the total on Schedule A (Form 1040), line 21...

Ths line on IRS Form 2106 takes a trucker's unreimbursed trucking employee job expenses and moves it to IRS Schedule A, Line 21.  The AGI is then transferred from IRS Form 1040 to Schedule A.

It is called the 2% limit because the truck driver or owner-operator will multiply his or her AGI by 2%.  Then, that value is compared to the trucker's employee business expenses (plus tax preparation fees) that came to Schedule A from IRS Form 2106.  Only the amount in excess of the the 2% limit is deductible.

We know this is still likely confusing, so here are a couple of examples of how the 2% limit affects trucker's taxes:

Example 1

Mike is a truck driver (owner-operator) who made $110,000.  We know that might seem inflated, but bare with us for illustration purposes.  Assume Mike's AGI (as calculated on IRS Form 1040) was $96,000 because Mike had some tax credits. Assume Mike's total employee business expenses from IRS Form 2106 came to $5,500; which included the per diem deduction, other travel expenses, and various trucking employment expenses.  Mike also had tax preparation fees that came to $280.  On Schedule A, Mike 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 decreased Mike's employee business expense tax deduction to $3,860 instead of $5,780.

Example 2

Steve is a truck driver who made $44,000.  We'll assume Steve's AGI (as calculated on IRS Form 1040) was $38,000 after tax credits were accounted for. Also, assume that Steve's total employee business expenses from IRS Form 2106 came to $4,800; which included the per diem deduction, other travel expenses, and various trucker employment expenses.  Steve also had tax preparation fees that were not included on IRS Form 2106 that added up to $215.  On Schedule A, Steve 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 reduced Steve's trucker tax deductions to $4,255 instead of $5,015.

One important thing to note from these two examples is that Steve (who had less employee business deductions than Mike) actually benefited more from the trucker business expense deduction because the 2% limit hit Mike harder.  In other words, the more a truck driver earns, the bigger the impact of the 2% limit.


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