Job Search Deductions
October 6, 2011
Job Seeker or Self-Employed?
Job seekers would be well-served to get tax advice for the numerous and tricky potential deductions for job search expenses. The most commonly-used provision, the “miscellaneous deduction,” can strictly limit write-offs, while the Alternative Minimum Tax may deny them entirely. However, for people who can earn income on the side while seeking full time employment, setting up a sole proprietorship can convert these limited write-offs into full deductions.
The miscellaneous deduction is the usual first option for deducting business cards, subscriptions, travel, entertainment, and other costs, but permitted expenses are deductible only to the extent they exceed 2% of the taxpayer’s adjusted gross income, and job hunting expenses are only deductible if the taxpayer is looking for work in the same occupation as that held previously. These limits can therefore eliminate potential deductions if the job hunter has a working spouse, a large severance, or other income.
The better option for job seekers who are able to earn some side income while they search may be to set up a sole proprietorship business with income and expenses reported on Schedule C of the tax return. Sole proprietorships can fully deduct “ordinary and necessary” business expenses, including deductions for travel, resume-preparation, health insurance premiums, travel, and business cards, as long as these costs are matched up against income on Schedule C. In addition, there is no requirement that the taxpayer seek work in the same former occupation.
To get the full deductions, the sole proprietorship must earn income. The IRS will closely scrutinize a business that does not show profit in at least three years out of five, but even a small profit opens the door to many deductions. Sole proprietorships must also pay the employer’s and employee’s share of payroll taxes on net income (currently 13.3%), and must file quarterly. There may also be a state tax liability.
Comparing the potential deductions under the miscellaneous deduction or under Schedule C, the benefits of setting up a sole proprietorship are clear. Under the miscellaneous deduction, unreimbursed medical expenses (including insurance premiums) are deductible only for those who itemize and only to the extent that they exceed 7.5% of the taxpayer’s adjusted gross income. With a low income, it is easier to exceed these limits. Meanwhile, for taxpayers who set up a Schedule C business, health insurance premiums may be fully deductible.
Home offices also usually get a better break if they are reported on Schedule C because of the limits on miscellaneous expenses. To be deductible, a home office must be used exclusively and regularly as the principal place of business. Professional fees, cell phone, business cards, and resume-preparation services for the business or the job hunt are often deductible as well, and equipment like a computer can be depreciated over time.
Thorough record keeping is the key for job seekers who anticipate taking deductions of any type. Receipts should be kept and a notebook or diary should be devoted to job-seeking expenses. Professional tax advice can be a significant money-saver in the long run.
photo credit: Manchester Library
Student / Dependent
August 9, 2010
Joe,
My daughter is entering her third year at the University of Minnesota this fall. Up until now we have been claiming her as a dependent, but I am hearing that rules for claiming a dependent are more complicated than verifying that they are your child and in school. What are the rules for this?
Percy, St. Paul
Percy,
Thanks for your question. You are absolutely right in saying that there are more qualifications to claiming someone as a dependent than they are your child and attending school. And given the soaring costs of tuition, room and board, and other “related” expenses, the ability to claim a child as a dependent come tax time is a vital wealth-management strategy.
The good news is that, unlike many IRS laws, the rules regarding dependency are relatively simple. Well, sort of.
A dependent is defined under IRS § 152(a) as either a qualifying child or a qualifying relative. Well, what is a qualifying child or relative?
To determine that, the individual must meet the qualifying general dependency test under IRS § 152(b). Namely the child must:
• Not be married. Unless, if married, the couple did not file a joint return for the past year or if the couple did file jointly, they did so only to claim a refund.
• Be a citizen, resident, or national of the United States or a resident of Canada or Mexico.
If the student in question meets the requirements of IRS § 152(b), then you move on to IRS § 152(c). That says a student must also meet these four tests:
• Relationship Test. The child must be either the taxpayer’s: child, stepchild (by blood or adoption), foster child, sibling, stepsibiling. Or a descendant of any of those.
• Age Test. The student must either be under 19 years old, or a full-time student under 24 years old. What constitutes a full-time student varies from school to school.
• Residency Test. The student must live with the taxpayer for half of the year. However, a student is considered “living with” an individual even if away due to a host of factors such as school or military service.
• Support Test. The student cannot provide more than half of college-related expenses himself.
So be careful in how much your child contributes to his education or be unable to claim your child as a dependent.
Seems simple enough, right? Well there are more complicated rules on things such as how divorced parents can claim dependencies. For those your best bet would be to contact a qualified CPA for more detailed advice.
Hope this answers some of your questions, Percy. If you have more questions feel free to give me a call and we can discuss further. Best of luck to you and your daughter.
Best,
Joe Rapacki
photo credit: chris.corwin
Deducting job search expenses
March 23, 2010
Joe,
I have been out of work for the past five months, actively trying to find a job. As tax time approaches, I want to make sure I get all the deductions I can on my expenses. I keep getting advice from friends and family on what I can deduct and the information I find online is even more confusing. Can you help me on which expenses I can deduct for job searching?
Mike, Plymouth
Mike,
First, sorry to hear about your job loss. You are in a position that many other people find themselves in: Actively searching for jobs in a market that is less than welcoming. I wish you luck in your searching.
That said, you asked about what you can deduct for job search expenses. Sadly, there is not an easy answer for you. You would think that with the fleet of other programs the government has rolled out to help those laid off from work, they would make it easier to deduct job searching expenses. However, they have not taken that route.
There are two big things you need to know about job search related deductions. First, the fees incurred must amount to at least 2% of your AGI (Adjusted Gross Income). So if you have an AGI of $80,000, you would need to have job search related costs totaling at least $200 to be eligible. Luckily (and I use that term lightly), being out of work tends to lower the AGI to a manageable number.
Next, all of your job search related deductions needs to relate to your searching for a job in the same field as your previous line of work. That means if you are laid off by one bank from your position as a loan officer but wish to find a new bank to work for, you can deduct those costs. However, if you are a former loan officer, and want to try your hand at marketing, your job search expenses are non-deductible. Sorry. The government isn’t budging on this one.
That said, if you meet the two above requirements, here are some eligible deductions, as well as a couple deductions that don’t qualify.
Eligible Deductions
* Employment agency or headhunter fees
* Career Coaching
* Resume writing
* Resume preparation, including copying, postage, long-distance calls
* Mileage to and from interviews and job counseling
* Transportation expenses for out of town travel, if the primary intent is job searching. Also, 50% of meals while out of town are deductible.
Non-Eligible Deductions
* Clothing and hair cuts, even if for job interviews
* Internet access
* Cell phone bills
* Expenses reimbursed by prospective employers
* Transportation expenses for out of town travel, if the primary intent is not job searching
That last point may be confusing. Ask yourself (and be honest, because the IRS sure will be), did I fly to Miami to look at a possible company or to spend a week on the beach at my friends condo—with a quick interview thrown in. Ask yourself what was the primary intent of the trip.
Mike, best of luck with the job search. Hopefully these tips will be able to save you a little bit of money come tax time. Should you have any further questions, please don’t hesitate to contact me.
Best,
Joe Rapacki
What to bring to your tax appointment
March 23, 2010
photo credit: hughelectronic
As April looms nearer, and people begin preparing for their tax appointments, I am flooded with questions about what to bring to tax appointments. So, in the spirit of tax season, here are some thoughts on how to prepare for your upcoming tax appointment.
The first piece of advice is also the most important (and probably the most ignored): Keep thorough records throughout the year. Each year you resolve to do this, but come April, you are sorting through shoeboxes, file folders, and behind the dresser for your W-2 or last receipt. Start now. Keep all your records in one spot. Keep a spreadsheet of expenses and deductions. And keep these things up-to-date.
The next piece of advice is to begin preparing and organizing your documents a couple weeks before the appointment. I have seen my share of clients who come to appointments with bloodshot eyes and frazzled nerves—and it’s not because they are worried about how much Uncle Sam is going to take—it’s because they spent the whole night before preparing.
So what do you need to bring to your appointment? Ask your accountant. Most will have a list of what they like to see. Since you asked me, here is a list of commonly needed items. You may not need all of these—but it surely won’t hurt to have them. I recommend sorting your information in the following categories:
Income Documents
* All your W-2s. When you receive one in the mail, keep them together with all your other documents.
* Form 1099-INT of interest statements from banks
* Form 1099-DIV from investments
* Form 1099-B from transaction statements from stock/bonds sold during year. Make sure to bring the original purchase price and date of purchase.
* Form 1099-G for any unemployment insurance received
* Scheduled K-1 received from partnership, estate, or S-corporation
* Social Security statements
* Any additional income (or debts) such as miscellaneous income from jobs, gambling winnings/losses, and alimony paid/received.
Deduction Documents
* Form 1098 for mortgage interest
* Mortgage points on a new home or a refinance
* Real estate taxes
* Vehicle taxes and license tab fees
* College and education expenses for you and dependents
* Interest paid on student loans
* Amount paid for child care providers. Also bring a tax ID number.
* Money spent for job-related travel, tools, clothing that you were not reimbursed for
* Contributions to IRA and other savings plans
* Expenses paid for medical items such as co-pays, prescriptions, hospitalizations, eye exams or glasses, mileage for medical appointments
* Donations to charities and churches. Make sure to bring receipts.
* Home improvements for energy efficiency and medical reasons
* Closing costs for real estate you bought or refinanced during the year
Business Records (If you have your own business)
* A spreadsheet with categorized expenses/income
* A mileage log of driving done for business. Make sure you include the date, location driven, and miles. I only need the total miles, but if you are audited, the mileage log can save you.
* Percentage use of items such as internet and cell-phone for business-related expenses
* Names of contractors, addresses, SSN, and monies paid
* Health insurance premiums
If you keep an office in your home, you are eligible to deduct proportional expenses of your utilities, repairs, and improvements. However, these deductions are complicated and can carry fees when you sell your home later.
Even if you have been less than fastidious in your record keeping, you can start preparing yourself now. If you bring these items in an organized fashion, your tax appointment will go much smoother and get you in and out of the appointment quicker.
And you can make next year the one where you keep the detailed records…
Temporary Work Location (in Different State)
August 10, 2009
photo credit: Shenghung Lin
Hello Tax Advisor!
I’ve been offered a month-to-month contracting job in Iowa. Looks like I’ll need to rent an apartment for the time I’m down there. What’s the IRS say about being able to deduct these living expenses?? Herb B. (in wonderful) St. Paul
Hello Herb:
In general, taxpayers may deduct ordinary and necessary expenses paid or incurred in connection with the operation of a trade or business.
In contrast, the IRS disallows deductions for personal, living, or family expenses, including meals and travel costs. Transportation between a taxpayer’s residence and principal place of business are normally considered nondeductible personal expenses.
An exception applies, however, if the taxpayer is working away from home and the employment is temporary, as opposed to indefinite, in duration.
In that event, the taxpayer may deduct meals and travel expenses associated with the temporary position. Furthermore, a taxpayer is not treated as being temporarily away from home while pursuing employment that lasts longer than one year.
If the employment is initially expected to last for a year or less, but subsequently continues for longer than a year, the employment is treated as temporary until the sooner of when the taxpayer’s reasonable expectations change or one year elapses. Indefinite employment carries the prospect that the work will continue for an indeterminate and a substantially long period.
Regards Joe Rapacki
