EXAMPLE: Ed U. Kator just got his teaching certificate in 2004. He still does not have a permanent position yet, but he is getting more and more substitute teaching jobs, so he is hopeful. He only made $20,000 (less than $400 per week!) in 2005.

Mr. Kator is single and with an adjusted gross income of $20,000, if he filed on a 1040EZ, he would be able to deduct the standard deduction of $5000 and his personal exemption of $3200 and thus have a taxable income of $11,800. His federal income tax would be $1,409. But with the special adjustment to income for educators (See below) he can deduct the $120 he spent on classroom supplies on line 23 of Form 1040. This drops his adjusted gross income to $19,880 and his taxable income to $11,680 and his federal income tax to $1386. That is only a drop of $23 but Mr. Kator has other deductible expenses, too.

Sometimes Mr. Kator has to drive from a morning substitute position at one school to an afternoon job at another school. In 2005 he had 5000 deductible business miles which allows him a deduction of $2185. [3000 x .405 + 2000 x .485 using the standard mileage rate. See Car Expenses below] He spent $100 for resumes and $1000 dues and fees. He also spent $240 on subscriptions to education journals and has spent $120 on classroom supplies. His total deductible business expenses are $3645 minus the $120 he already took as an adjustment to income. 2% of his adjusted gross income (after taking the $120 adjustment to income for classroom supplies) is $398. Even after that $398 is deducted, he still has employee expenses of $3247 [$2185+$100+$1000+$240-$398]. This is smaller than his standard deduction of $5000. However, if he has other itemized deductions, including mortgage interest, property taxes and state income tax or state sales tax, of greater than $1753 then he can reduce his taxes by itemizing. Therefore, Mr. Kator lists his employee business expenses on Form 2106 and transfers the total on line 10 to Schedule A, line 22. On line 25 he deducts the $398 and totals all his itemized deductions. Assuming that he has other itemized deductions totaling $3600, when his substitutes the itemized deduction total of $6847 [$3247 + $3600] for the $5000 standard deduction, he finds that he has a taxable income of $9,833 and his federal income tax has dropped to $1,109 -- a savings of $277.