I Lost My Job, Now What? Tax Issues of Unemployment, Part 5: What Can I Deduct?
You may have heard about some of the things that you can deduct if you’re looking for a job: copying and mailing your resume, trips to another city for a job interview, fees you may pay to a headhunter, etc. Basically, any costs that you incur in trying to obtain a new job are considered tax deductible—but before you get too excited about that, let me explain the restrictions. When all is said and done, the likeliness that you’ll get a deduction for your job search is pretty slim.
First, you can only deduct your job search if you are looking for a job in the same career field—and boom, college students looking for their first job after graduation are automatically excluded because you have to already be in a career. For example; let’s say you’re a cop and you get laid off, but you also have a degree in accounting. You can write off your expenses if you’re looking for police work, but not if you’re looking for an accounting job.
Okay, so Dirty Harry would not be looking for an accounting job.
Sorry, I got a little off track. Anyway, the next issue you have to deal with in claiming these deductions is the 2% limitation rule. That means that any expenses that you deduct will have to be more than 2% of your income. So if you only spend $50 on copying and mailing your resume, then your income will have to be less than $2,500 for you to be able to take a deduction. Let’s face it, if your income is under $2,500 for the year—you don’t need a deduction!
But suppose you had some serious job search expenses—you took a few flights that were not reimbursed by the company, add a few hotel stays, paid a fee to an employment agency, etc. Maybe you spent $4,000 on job hunt expenses. Now if you had income of $40,000 before you were laid off, then your 2% threshold would be $800—that would give you a $3,200 deduction on your schedule A. So this is starting to look pretty good right? But what if you don’t have any other deductions to claim on your schedule A? You don’t own a home so there’s not real estate tax or mortgage interest to deduct. Maybe your other deductions only total $2,000. That means you’d still be better off claiming your standard deduction so there’s still no tax benefit for your job search expenses.
But that doesn’t mean you shouldn’t keep track of those expenses. Save your receipts and keep track of that mileage. Despite my gloomy forecast about being able to claim those expenses they just might come in really handy. For example: let’s say you’re in marketing. You join several networking groups, use your cell phone as a business line, meet with several different people over lunch to discuss opportunities, and you print up some personal business cards. Then company X needs a marketing guy to do a project for them—not a permanent hire but just a subcontracting job. They call you. At tax time, you don’t get a W2, you get a 1099MISC because you were contract labor. Suddenly, all those receipts become very handy because you can use many of them as self employed business expenses. Now, instead of being worthless, they are incredibly valuable deductions because 1099 income is taxed at the self-employment rate plus your regular tax rate.
When making spending decisions about your job hunt, make the assumption that you’ll get no tax benefit from what you’re doing. Make your decisions based upon, “Is this a smart move for me to make or not?” If you manage to get a deduction for it, great—but if you don’t, you won’t feel cheated because you’ll know that you spent the money for the right reason.