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Job-Search Deductibles: Evade Mistakes, Not Taxes

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There are plenty of rules in the tax code, and it’s easy to break one when filing job-search expenses. Click here for TheLadders’ abridged story of what tax errors to keep in mind to stay on the right side of Uncle Sam. The unabridged story appears below.

Her husband is an aeronautical engineer. They moved from Texas to Connecticut, where he got work with a big defense contractor. She, however, worked in what has become one of the hardest-hit sectors in the recession: financial services.

Obviously, finding a job in her new state wouldn’t be easy. Neither, apparently, was doing her taxes, since she didn’t have a firm grasp on what job search expenses she could deduct.

“She was missing a lot of things,” said Theodore D. Lanzaro, Jr. CPA, CFE, CrFA who works at Lanzaro CPA, LLC. “There was stuff she wanted to deduct but didn’t know she could. She had had a lot of obvious stuff, like driving to an interview, phone calls, prepping her resume, but she didn’t have [deductions for], for example, [talking] to a career counselor. She paid somebody $250 for career counseling. That’s deductible, but she didn’t know that. She didn’t know she could deduct newspapers and magazines she bought to look for jobs.”
The more they talked about how she was going about finding a job, Lanzaro said, the more deductions they found she could take. While Lanzaro eventually discovered another $500 in taxes that the woman owed, the savings made up for it, since his firm found her a couple thousand in deductions.

Given what the calendar’s telling us, TheLadders thought it was high time to talk to tax experts to find out what job search-related expenses are deductible and which ones aren’t. We don’t want you paying to get your resume professionally written and then miss out on getting part of that money back, nor do we want you mistakenly shelling out big bucks for a new suit, mistakenly taking it for a deduction and getting in hot water with the Internal Revenue Service. So dig out your tax receipts from 2009 and read on to find out what’s kosher in the land of tax deductions and what’s not.

What’s OK to Deduct
As tax experts point out, a major point to consider before deducting job-seeking expenses is that the amount of all miscellaneous itemized tax deductions must total up to more than 2% of your AGI (adjusted gross income). To figure your tax deduction, subtract 2% of your AGI from the total amount of your expenses. Job search expense deductions are also subject to the overall limitation on itemized deductions based on income threshold amounts.

If your deductions do come out to be more than 2% of your AGI, these are the job search tax deductions you can take:
1. Employment agency/career coaching fees. Bear in mind that if in a later year your new employer repays your agency fees, you must include the amount in your income up to the amount of the deduction you claimed earlier. If your employer pays fees directly to the agency, you don’t have to include them in your income.
2. Resume preparation. This includes typing and printing, postage, and any photographs required for your resume.
3. Round-trip travel to job interviews. That includes airfare, mileage, meals (at 50%) and lodging (actual expenses only). For your 2009 return, you can deduct 55 cents per mile for driving to and from interviews. Note that this is dropping to 50 cents per mile in 2010. Beware on travel deductions, however—as we mention below, if you combine a vacation with a trip to conduct an interview, you could get into trouble. Note that you can deduct travel even if you don’t get a job offer.
4. Advertising for a job, such as in the “job wanted” column of your local newspaper.
5. Newspapers and periodicals purchased to search through employment ads.
6. Phone charges incurred when setting up interviews.

To qualify, tax experts said, your job search must be for a job in your current, or most recent, trade or business and should be at a similar level of responsibility with duties similar to those of your most recent job. If you haven’t held a job in that trade or business for an extended length of time, your job search will be considered for a new trade or business, and your deductions may not be allowed.

Recent college graduates should bear in mind these qualifications: If you held a college internship or valid job while in college and your search is for a job in the same trade or business, you will be able to deduct job search expenses.

However, if you’re just out of school and had no paying jobs while in school that were related to your trade or business, your deductions won’t be allowed.

As pointed out by Bob Meighan, CPA and vice president at TurboTax, you don’t have to be unemployed to write off your job search expenses. The rules, however, still require that your job search be in the same line of work you’re currently in.

Paying Taxes on Unemployment
Meighan noted that those who are job hunting due to a layoff should remember that any severance or compensation received is taxable money. However, the first $2,400 of unemployment benefits are tax-free.

Education Credits
Many of us are heading back to school to be retrained in the wake of layoffs. Add up the tuition, related fees and books, and we’re talking serious money.

There are two education tax credits to be aware of: The American Opportunity Credit (http://www.irs.gov/newsroom/article/0,,id=205674,00.html) and the Lifetime Learning Credit. (http://www.irs.gov/individuals/article/0,,id=96273,00.html#QA1)

The American Opportunity Credit gives credit up to $2,500 per student for post-secondary education. It breaks down to 100% of the first $2,000 of expenses and then 25% of the next $2,000, said Melissa Labant, a tax expert with the American Institute of CPAs, (http://www.aicpa.org/). In order to claim the entire $2,500 credit, you’d spend a total of $4,000 in education expenses. This credit is more generous than others in that it not only covers tuition and related fees but books as well.

Note that married couples filing jointly can get 100% of the credit if they make $160,000 or less, making it widely available to middle-class taxpayers, Labant said.

Graduate-level classes typically fall under the Lifelong Learning Credit, she said. This credit covers individuals paying qualified tuition and related expenses at a post-secondary, eligible educational institution. The IRS’ site points out that “unlike the Hope Scholarship Credit, students are not required to be enrolled at least half-time in one of the first two years of post-secondary education.”

Typical Tax Mistakes
Labant says she often sees clients making mistakes on these deductions:

  • Meals. The Internal Revenue Service has special rules regarding how much of the money we spend on meals is tax-deductible, whether the meals are job-related or enjoyed on interview day.
    “A lot of people think [meals are] 100% deductible, but that’s not the case,” she said.

    According to the IRS’ entertainment-related page, (http://www.irs.gov/publications/p463/ch02.html#en_US_publink100033877) you can deduct 50% of business-related meal and entertainment expenses, unless you’re subject to the Department of Transportation’s “hours of service” limits—check the entry labelled “Individuals subject to “hours of service” limits on that page for an explanation of what those limits are. “The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed,” according to the IRS.

    Meals you buy while traveling away from home, whether eating alone or with others, are reimbursable at that 50% rate. But don’t mix business with pleasure and think you can deduct the whole package, Labant warns.
    “People take jobs to look for trips, but it’s more a vacation,” she said. “If they’re vacationing three days and looking for work one day,” that’s not deductible, she said. “The primary purpose has to be to seek a job, not personal recreation.”

  • Manicures, hair cuts, clothing. Nice suit. Must have cost you a little cashola, huh? But you’re serious about your job search. You’ll look good in the interview. Besides, you can always deduct it on your tax return, right?
    Wrong. According to Labant, your interview duds are considered a personal expense and hence aren’t deductible.
    The same goes for other personal-care expenses such as haircuts and manicures, tax experts said.

  • Moving expenses. Moving expenses are in fact deductible, but the new job has to be at least 50 miles away from your old job to your new job, Labant said. For example, if your old job was 10 miles away from where you live, your new job has to be at least 60 miles away. In other words, your commute has to grow by at least 50 miles.

    In addition, the moving expenses deduction generally only pertains if you’re moving to work full-time.
    Quite a few types of moving expenses qualify, Labant said, including paying someone to pack you up and move you. Some don’t. For example, once you move, if you fly back to visit your old house for any reason, you can’t deduct your travel. Nor can you deduct part of the purchase price of a new home or the loss you might take on selling your old home. Tax rules also rule out taking a deduction if you lost money on anything having to do with your old home, whether you lost a security deposit on a rental, you broke your lease or you lost money discontinuing membership in a country club.