People often ask me about deducting job search expenses on their tax returns. Every year I hear stories on the news, “Don’t forget, your job search expenses are tax deductible!” While this is true that job search expenses can be deductible—many times, they really aren’t.
For one thing, if you’re job hunting, you can only deduct your job search expenses if you’re looking for a job in your current occupation. I do taxes; I’m in the accounting field. If I decide to chuck it all and become a belly dancer—I couldn’t deduct those job search costs since belly dancing is not related to accounting. (Tap dancing—maybe: http://www.youtube.com/watch?v=fNKRm6H-qOU)
But say you truly are looking for a new job in your field, what can you deduct? Here’s a pretty good list:
- Employment and job placement agency fees
- Cost of preparing and mailing copies of your resume
- Travel expenses to look for a new job, but only if the trip is primarily to look for a job. (If you’re a professional snow remover and you’re job hunting in Honolulu it’s really not going to fly with the IRS.)
- You can deduct your job search expenses even if you do not find a new job
After you figure out what your qualified job search expenses are, it goes as a miscellaneous itemized deduction on your Schedule A. That means that your job hunt expenses will have to be more than 2% of your adjusted gross income before they even start to count. And remember that even then, you’ll need enough other items on your Schedule A form to make it worth your while—also known as itemizing deductions.
Here’s an example: Christie is an office manager for a small law firm and makes $50,000 a year. She paid $500 to a professional resume service, and $2,000 to a placement agency to help her find a new job. Although most of the out of state companies that interviewed her paid for her travel, she did have $100 of out of pocket travel expenses. In this case, Christies total job search expenses were $2,600.
Now 2% of Christies adjusted gross income is $1,000 ($50,000 times .02 = $1,000.) So in this case, Christie would have a miscellaneous deduction of $1,600. ($2,600 expenses – $1,000 threshold = $1,600.) So if Christie had other deductions to go along with it, great, then she could benefit from claiming her job search expenses. If she didn’t have any other deductions, then she’d still be better of claiming her standard deduction.
You cannot deduct your job search expenses if you are looking for a job for the first time. This rule keeps most recent grads from claiming job search expenses.
Don’t let not being able to claim a deduction keep you from spending money that you need to spend to look for a job. If your resume needs help, hire a resume writer. If a placement agency can help you, use one. Be sure to put your best foot forward.
For some good free advice about job hunting, check out this website from BestCollegesOnline.com. Although the article is written specifically for online students, there’s so much good and basic job hunt information in there it’s worth checking out. Face it, when you don’t have a job, free is a pretty good price. Here’s a link: http://www.bestcollegesonline.com/career-skills-learn-school/
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”
You probably have come across time value of money in one your finance classes or at least have a basic understanding of the idea. Time value of money, as defined by Investopedia.com, is “the idea that money available at the present time is worth more than the same amount in the future due to its potential earning capacity.” Basically, money is worth more now than it is later. This idea would not exist however, if there was no concept of “interest”.
There are two types of interest – simple and compound. Simple interest is interest paid on a beginning principal balance only. If you are receiving monies, the interest earned in a given period is not added back to the principal and then applied the interest rate again and appears perfectly linear on a graph. Compound interest is interest paid on a beginning balance and any interest that has accumulated in given a period of time. On a graph compound interest appears with a geometric (or exponential) growth pattern.
The present value of a future sum is the core formula for the time value of money. All time value of money equations are based off this formula so it is extremely important to review. It is expressed as such:
PV = FV / (1 + i)^n
PV = Present Value
FV = Future Value
i = interest rate
n = number of periods
The future value of a present sum is expressed as FV = PV * (1 + i) ^n. We won’t discuss perpetuities or annuities in this post nor will we execute any actual calculations with the TMV formulas.
So how can we use this time value of money concept for tax optimization and more importantly, individual wealth?
Retirement Planning: We have all seen the example where Johnny starts an IRA at age 35 while Susie starts one at 21 and the amazing difference of the account values when they both reach age 59 and a half. This is because Susie’s IRA endured 14 more years of compounding. The choice between a roth and a traditional IRA has important tax implications and time value of money has some influence in the decision. With a Roth IRA for example, the taxpayer can receive tax free distributions of earnings at age 59 and a half while with a traditional IRA, the taxpayer receives an above the line deduction on IRA contributions – given that AGI thresholds are not crossed – and is taxed on the distributions. If your income is expected to increase as you get older and your marginal tax rate is also expected to increase, then a Roth IRA makes more sense – naturally. Do the immediate tax savings of traditional IRA contributions outweigh Roth IRA tax free distributions?
Tax Planning: Accelerate deductions, postponing income recognition. This concept goes hand in hand with the time value of money concept – money today is worth more than money tomorrow. By accelerating deductions you essentially reduce your taxable income and end up with a bigger refund or smaller balance due. Some examples include prepaying your home mortgage interest in a given year, making an alimony payment in December as opposed to January, and writing off an asset using section 179 expensing or bonus depreciation as opposed to depreciating it over several years. The amount of tax savings probably doesn’t have enough compounding power for individuals to make a huge substantial presence but for well established businesses it most definitely does. Examples of postponing income are increasing your retirement plan contributions to a 401(k) plan, legally deferring compensation, and delaying the collection of any debts you are owed.
Investment Planning: Younger people can be more aggressive because they have more time to make up for their losses. A younger person’s portfolio can afford more risky securities such as stocks. As one gets older, the switch to dividend producing stocks and bonds usually happens because the “interest rate” is more stable.
With time value of money, the uncertainty of the interest variable is the most difficult to tame. Those who can predict its patterns the best, tend to make the most money.
I see a lot of internet questions about flat taxes and progressive taxes. It seemed that since I do a tax blog, it was time to tackle those basic questions.
A flat tax is a tax that is the same for everyone, under all circumstances. A good example of a flat tax is the sales tax rate. It doesn’t matter whether you are rich or poor; everyone pays the same sales tax percentage. Some cities have a flat income tax. For example: The City of St Louis, Missouri has a 1% income tax on wages of people who live or work within the city limits. It doesn’t matter whether you make $15,000 a year or $150,000 a year; you still pay the 1% city tax.
A progressive tax increases as your income goes up. This is what our current federal tax code is like. For a single person, the first $9,750 isn’t even taxed. Then the next $8,700 is taxed at 10%, the next $26,650 is taxed at 15%, the next $50,300 at 25%, the next 93,300 at 28%, the next $209,699 at 33% and anything over $388,351 is taxed at 35%.
Those rates change if you’re married or filing as head of household. I’m not going to post all the tax rates here. If you want to look, check out the tax rate tables at the IRS website: http://www.irs.gov/pub/irs-pdf/i1040tt.pdf The tax rates are all listed on page 14.
Tax Incentives are tax rules that are intended to influence behavior. Things like the mortgage interest deduction which is designed to help people buy homes, or the charitable donation deduction which is designed to get people to donate to charity are examples of what would be considered tax incentives.
There’s been a lot of talk about changing the tax code. Right now, we have a progressive tax code with lots of tax incentives. Major changes to the tax code will be difficult to pass; there are many lobbyists and interest groups that all have their own agendas. There will be lots of pressure on our representatives to keep the tax loopholes. The whole concept of changing the code is so controversial that the Senate Finance Committee leaders have offered to keep Senator’s ideas secret for 50 years. http://www.businessweek.com/articles/2013-07-25/congress-will-keep-senators-tax-reform-wishes-secret-for-50-years
The tax code has nearly doubled in length over the past two years. If I had any say in the voting, I’d like to see the tax code made easier. Yes, a difficult tax code keeps me employed, but I can live with the consequences. I think a simplified tax code is good for the country.
What changes would you make? What deductions do we really need, if any? What needs to go? Post your answers, I’m curious. Your post won’t show up immediately. My site has a delay to screen for spam. You wouldn’t believe what kind of weird comments there’d be without it. But if you make a post, it will show up within a day or two. Thanks.
Update: I posted this blog on Tuesday morning, August 6. Tuesday evening I saw this segment on The Daily Show. I’m pretty sure that John Oliver doesn’t read my blog, but he’s at least on the same wave length. http://www.thedailyshow.com/watch/tue-august-6-2013/don-t-mess-with-taxes
Here’s the other stuff you’ve got to know:
If you’re trying to negotiate a payment agreement and things are just not going your way, it’s okay to back out before you commit. Tell them that you think you’re going to need professional help and that you will have to call them back later.
Once you do have an agreement, you have to hold up your end of it. Make your payments on time. If you’re late, your installment agreement is void and you’ll have to start all over again–including the $105 fee for setting up the agreement. (Not to mention those nasty letters they send about putting a lien on your home and levying your bank account.)
Welcome to the world of parenthood. Raising kids is hard enough with help but it’s even harder when you’re alone. Here are some tips to help you navigate the changes that will happen to your tax return, because you deserve a little help once in awhile.
Claiming your baby as a dependent: If you are earning income (over $3650), then you’re going to want to file a tax return and claim your baby as a dependent. I sometimes hear women say they didn’t claim their children because the child was born in December and they read the child is supposed to live with you for 7 months. In the year of birth, you claim the child even if he was born on December 31st. Let’s be honest, if you’ve just gone through a pregnancy, that child has been living with you for more than 7 months anyway. Claim your baby! We’ll talk a little more about possibly letting someone else claim the baby, but unless there are special circumstances, plan on it being you.
Changing your filing status: If you’re on your own and supporting yourself, then once your baby is born you will change your filing status from Single to Head of household. It gets a little more complicated if you are living with your parents, the baby’s father, or someone else. The issue becomes, who is providing most of the support for the child? If you’re using computer software, there are all sorts of questions you can ask to determine how much support is provided to the baby and by whom, but here’s a quick and easy technique that’s pretty helpful. If you prepare the tax return with Head of Household status, and then switch it to Single status and the refund amount is exactly the same, then claim Single as your filing status. If your income is so low that your refund won’t change, then you really don’t need Head of Household status. The IRS will audit returns claiming HH status when the income is too low, they never audit Single for the income being low. Why not just avoid a headache that you don’t need. The Earned Income Credit amount is the same for single as Head of Household filers.
What about letting someone else claim the baby? If you are living with the baby’s father and it would benefit you to have the child on his tax return instead of yours, then that’s fine. If you are living with your parents and they are supporting you and the baby, you can let your parents claim the child. Your parents would have to make more money than you do to be able to do this.
Letting anyone outside of you, the father, or a grandparent claim your child on a tax return has the potential to get you into trouble and even land you in jail for tax fraud. There are a few situations where it can be done, but for that you should go see a professional. The rules regarding dependents change often. Things that were allowed a few years ago aren’t allowed now. Sometimes well meaning friends and relatives can give you bad advice which could get you into big trouble. Protect yourself.
The Earned Income Credit: Many single moms, especially when they’re just starting out, qualify for the Earned Income Credit. It’s a refundable credit, that means you get the money even if you didn’t pay any tax into the system. EIC is a big deal and can make a huge difference on your refund. That’s why people may want to try and claim your baby for you. There’s between $13 to $14 billion dollars a year of EIC fraud. It’s also why you need to be careful, the IRS is very aggressive about pursuing EIC fraud—that’s why you don’t let anyone else claim your child.
Also, you need to protect your child’s social security card like it was gold—it’s that valuable. Infant identity theft happens all the time. You won’t know it’s happened until you file your tax return and it get’s rejected because someone else has claimed your child. Do not carry the card around in your purse. If you have a safe deposit box, put it there. Store it someplace safe.
Note: We try to answer all the questions that come to us but please be patient. It’s our busy season right now. We may not get to your post until the weekend. When you make a post and use the capcha code, it won’t immediately show up. You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of. (We try to keep this a G rated website.) We have to edit those out. If you need an answer right away, here are some links that might help:
How to find free tax preparers: http://www.irs.gov/Individuals/Free-Tax-Return-Preparation-for-You-by-Volunteers
How to find your local IRS office: http://www.irs.gov/uac/Contact-Your-Local-IRS-Office-1
If you want to hire us, please call (314) 275-9160 or email us. We do prepare returns for people all over the country (and a few foreign countries as well.) We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.
Dear Mr. Dooley,
I read in the St. Louis Post that you recently released your personal income tax return for public inspection. I do taxes for a living so of course I had to check. The first thing I noticed is that you prepare your own taxes. The second thing I noticed is that you missed a big deduction. Mr. Dooley, you forgot to claim the real estate taxes that you paid in 2009. You missed out on a $1,056 deduction (real estate taxes paid is public record.)
Mr. Dooley, the tax money you would have saved on this deduction alone would have covered the cost of having your return professionally prepared. Who knows what else you could have missed that I can’t just pull up on the internet.
Mr. Dooley, I’m looking forward to seeing you in my office this coming February. If you’re going to be making your tax returns public, they’d better be right.
With the economy being in turmoil, a lot of people are turning to contract labor jobs. That’s where the company doesn’t hire you as a regular employee, even though you work for it. You won’t receive a W2 at tax time, but you will receive a form 1099MISC and you will be expected to pay tax on that.
Contract labor is good for employers who are a little gun shy over hiring. It’s also good for employees who may need to work to put food on the table, but don’t want to commit to a job that they wouldn’t ordinarily take.
If you’re thinking about accepting a contract labor type job, here’s a few things you should know. First, when you receive a form 1099MISC, the IRS treats that as self employment income. That means, at tax time you’re going to have to file a Schedule C along with your 1040 long form. You will be required to pay your own Social Security and Medicare taxes, in addition to paying what your employer would normally have withheld.
Let’s use an example: Heather and Melanie are both high school seniors looking for summer jobs. Heather gets a job at McDonald’s making $10 an hour. Melanie gets a contract labor position also making $10 an hour. They both work 20 hours a week. Since this is the only income the girls will make all year, we’re not even going to look at regular income tax (they won’t owe any) we’re just going to look at their take home pay and self employment taxes.
Since Heather works as an employee, McDonad’s is required to withhold her Social Security and Medicare taxes (FICA). Heather makes $200 a week, but she’ll only take home $184.70 because McDonald’s will hold back $15.30 to pay her FICA. What most people don’t realize is that in addition to the money McDonald’s holds out of Heather’s paycheck, McDonald’s also pays an additional $15.30 towards Heather’s FICA. At the end of 12 weeks, Heather will have $2,216.40 that she was paid by McDonald’s. She will owe no income tax at the end of the year.
Now let’s look at Melanie. As a contract laborer, Melanie has no FICA withheld from her pay. For one week, she gets a check for $200. At the end of 12 weeks, she’ll have been paid $2,400. The difference here is that Melanie will have a tax bill of $339 that she’ll owe at tax time. After paying her taxes, Melanie will only have cleared $2,061.
[Geek alert: if you checked my math, you'd say. "but 2400 times 15.3% is $367" -and yes, you're right. The first $433.13 of self employment income isn't taxed so the actual equation is income x .9235 x .153.]
In our example here, it’s better to be hired as an employee because the company pays half of your payroll taxes. But that doesn’t mean that you should not take that contract labor job. For one thing, you may be able to write off some of your job expenses, which would reduce your self-employment taxes. Or, you might negotiate a higher hourly wage rate. An increase of 7.65% would basically cover the additional tax paid by the employer. Knowledge is power. Knowing how you’ll be taxed and how much you’ll be taxed let’s you make smart decisions.
In my neighborhood it’s back to school week! Here’s some tax tips related to sending the kids back to school.
It seems like if they start school on Monday, then the gift wrap/candy sale starts on Tuesday. If you have a choice, you’re better off writing a check directly to the PTO for whatever donation you’d like to make to the school rather than buying whatever the kids are selling. For one thing, the school will get all of your donation instead of the money going to some fundraiser sales company. For another, your check to the PTO will be 100% tax deductible. (I would argue that 50% of whatever you pay for the gift wrap should be counted as tax deductible as well, but the fund raising companies will argue that their gift wrap really is worth $7 per roll so it’s an iffy deduction.)
If you’re a school volunteer, the money you spend for the classroom counts as a charitable contribution. Same goes for scouts and church groups. Now if the kids pay an activity fee and you’re using the kids’ activity money to buy supplies, then you can’t deduct those receipts. But if you’re spending your own money on projects, then you definitely can use that as a deduction. Scout leaders–your uniform is deductible, your kids uniform isn’t.
Remember that the mileage you put on your car for volunteering is also deductible with your contributions. Charity miles are counted as 14 cents per mile. It doesn’t seem like much, but for some people it really adds up.
One final thing, if you’re on your school’s PTO, or other charitable organization, make sure that your organization has filed it’s not for profit tax forms (990) with the IRS. Most schools groups never had to file before because PTO’s generally have receipts of under $25,000. But a law passed in 2006, made filing mandatory. Thousands of not for profits are in danger of losing their charitable status and could wind up having to pay taxes on all those school fund raising efforts. The IRS has granted relief to these groups until October 15th. You can check if your group is in danger of losing it’s charity status by checking the IRS website: http://www.irs.gov/charities/article/0,,id=225889,00.html
Your scout troop or den is covered by the national organization, and your church has different rules, but school groups really need to check this out. Welcome back and have a great year!
Have you ever gotten one of those Refund Anticipation Loans (also known as RALs) with your tax return? Those are the “fast money” refunds where you pay a fee and get your refund immediately, or perhaps in one or two days instead of waiting for two weeks. What the IRS has just announced could pretty much put and end to those types of loans.
In the past, the IRS has provided tax preparer firms and financial institutions with a “debt indicator” tool. Basically, when a tax return was prepared, if a person applied for the RAL, there would be a response about any government debt owed by the individual. Basically, if debt was owed, the RAL would be denied because the loan is secured by the anticipated refund.
According to the IRS, they no longer see a need for these Rapid Refund Loans since a person can receive his or her refund in 10 days. There’s been a great deal of public pressure against RALs. Consumer groups such as the National Consumer Law Center and the Consumer Federation of America have opposed RALs for years. One reason is that RALS are usually targeted at low income households and the fees are often very high in relation to the loan provided. The profit motive in RALS can sometimes lead to predatory and even fraudulent activity. In 2008, the latest year that I could get figures for, 8.4 million RAL loans were made. $738 million was spent on loan fees. $68 million was spent on other related fees.
Individuals will still have access to their own personal information concerning debt via the “Where’s My Refund?” application on the IRS website.
For a look at the IRS press release dated August 5, 2010, click here: http://www.irs.gov/newsroom/article/0,,id=226310,00.html
I recently read an online forum where a fellow wanted to sue his employer for not properly withholding the man’s income taxes from his wages. While I felt sorry for the man and his looming tax debt, given some of the information he posted, I wasn’t convinced that the employer was at fault. But the tax code and the forms are all pretty confusing, so how do you know that you are withholding correctly? Fortunately, there is help.
First and foremost, if nothing has changed about your job or life situation and you’re happy with your refund/balance due situation, this isn’t for you. If everything is fine, why change? But–if you owed too much last April, or you had a job or lifestyle change, then you really should do a mid-year evaluation to make sure that your withholding is on track. It’s a whole lot easier to change your withholding now than it is to make adjustments in December or after the year is already over.
What you need to do is have a copy of your latest pay stub and your last tax return handy. You’ll need both to answer the questions in the calculator. Then you’re going to click on the link to the IRS withholding calculator:
Now I’m going to be honest, the first time I looked at this I went, “Oh gee, who’d want to bother with this?” But seriously, it’s the best program for figuring out where you stand for your taxes. For most situations, I like it better than some of the fancy professional tax projection programs I’ve used. Most importantly, you don’t need any special training to use it. Just answer all the questions. Sometimes you may have to guess, but do your best. You really do need to have your latest pay stub and last tax return to do this though. If you’re just estimating, it’s not going to be helpful.
The program will tell you, based on what’s actually been taken out of your check, how much your refund or balance due will be. And, if you are expected to owe, it tells you how to change your withholding so as not have a balance due.
So let’s say you ran the program and it does recommend that you change your withholding. What next? That’s easy, take the information to your employer (or the payroll department) and fill out a new W4 form. Unlike some other paperwork that can only be completed annually, you are allowed to change your W4 any time during the year.
So about that guy who wants to sue his employer? I’ll leave that up to the courts. As for me, I’d rather catch a problem before it gets out of hand, and the IRS withholding calculator lets me do that.