Your Job Search and Your Taxes

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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:


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   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:

Time Value of Money and Taxes

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“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

-Albert Einstein


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, 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.

What is a Progressive Tax? What is a Flat Tax?

Income Tax

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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: 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.


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.

How to Negotiate Your Own Payment Agreement With the IRS

Tax On Money Background
I’ve heard two stories in just as many days about people who paid one of those TV tax companies thousands of dollars to help them with their IRS debt and when all was said and done, all they got was a monthly installment agreement with the IRS.  I’ve got a big problem with that–because in both of those cases, the people could have used that money to pay down their debt–and done the installment agreement themselves for free.
While not everyone can handle their IRS tax debt problem themselves, before you go sending thousands of dollars to some company with a 1-800 phone number, lets see if you can handle this yourself for free first.
The first question:  Do you really owe the money in the first place?  That’s pretty important.  If your taxes were professionally prepared and you have a huge balance due-well you probably really do owe the IRS.  On the other hand, if you haven’t filed for several years and the IRS says you owe them lots of money–there’s a good chance you don’t.  Anybody does taxes better than the IRS–anybody!  The CPA down the hall, H&R Block, VITA, the really bad tax place I won’t name down the street, and even my high school intern — they all do taxes better than the IRS.
True story:  a couple of years ago, I had a high school intern while I was working at the big tax company.  She had only been there for a couple of days, she was supposed to help with the phones, photo copies and data entry type stuff.  A woman came to me with an IRS tax debt of $16,000.  I took the case, but I was busy working on another return so I asked the intern to just do the basic data entry work for me.  A little while later she came to me and said, “I did the data entry but I’m afraid you’re going to have to show me what I’m doing wrong.”  “What do you mean,” I asked, “It’s just data entry.”  “I know,” she said, “But I heard you say she owes the IRS $16,000 and on all the returns I input she’s got refunds!”
I looked over everything the girl had done.  It was perfect.  Instead of the woman owing the IRS $16,000, the IRS owed her $8,000.  So when I tell you that anybody prepares a tax return better than the IRS–I’m not kidding.  Now you can go to an IRS office and they will help you with a return–those people know what they’re doing (usually), but those computer generated IRS returns that get mailed to you are garbage.  Plain and simple.
Second question:  Do you owe less than $50,000?  If you owe more than $50,000, you won’t be able to do an IRS streamline installment agreement.  If you can pay enough on the debt to bring it to $50,000 or less, then you can still do the streamline–otherwise you are going to want to get some help with your debt.  But let’s say you owe $52,000.  Well, you could pay some tax company $8,000 to negotiate for you, but if you paid $2,000 towards the debt, you could negotiate for yourself and still have $6,000 more pay your debt or buy groceries or whatever.
Third question:  How much can you afford to pay each month?  Let’s say you got hit with an IRS bill of $6,000 and you just didn’t have any money saved to pay it.  Realistically, look at your financial situation and figure out what you can afford.  What’s the most you could possibly pay without causing yourself a hardship?  That’s going to be your upper limit number.  You need to think it through because you don’t want to commit to paying $500 a month if it means you lose your house.
Here’s the mechanics of it:  In a perfect world–you should be able to pay of your IRS debt within 2 years (24 months.)   So if you take that $6000 and divide it by 24, then your monthly payment would be $250.  And if you can afford that–great!  That’s the preferred timeline for the IRS to have you pay off your debt.
But if you can’t handle the $250 a month, you need to know that the IRS will go as far as 72 months (or six years) for you to pay off the debt.  So if you take $6,000 and divide that by 72 then you get $85 dollars a month (I rounded up to the nearest 5.)
What you might want to do is negotiate the $85 payment, but then pay the $250 to get rid of the debt faster.  That way you’ve got some wiggle room if you lose your job or have some other issue.
Here’s the other stuff you’ve got to know:
There is a fee of $105 for setting up the installment agreement.  It’s lower if you set up direct debit from your checking account or it may be reduced if your income is low–make sure you ask about it, they won’t always tell you.
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.)
One final word, if you can’t handle the installment agreement yourself–maybe your tax issue is too complex or you’re just too intimidated to deal with the IRS, get help from a local professional.  You’ll need an enrolled agent or CPA because they’re licensed to represent you before the IRS.  I recommend using someone local (okay, someone like me) that you can meet with in person.  Sometimes, IRS debt issues will cost a few thousand dollars to settle up, depending upon the work that needs to be done.  But it’s important to know what is going to be done before you pay that kind of money out.  $8,000 for something you can do yourself is too high a price.  Ask questions, know why they’re charging you that much, and what you’re getting for it.  You have a right to know.

Open letter to Charlie Dooley

Charlie DooleyDear 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.

Employee or Contract Labor

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.

Back to School Time

Whho’s Back to School Time


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.  For example, let’s say you’re the “Halloween Party Mom.”  You spend $30 on candy, $20 on art supplies, and $15 on face paint.  Save those receipts because that’s a $65 contribution to the school.  The same goes for scouts and church groups.  Hold on to those receipts for  those projects as well.


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.


Welcome back and have a great year!


IRS Plans to Remove Debt Indicator for 2011

IRS Plans to Remove Debt Indicator for 2011

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:,,id=226310,00.html

Checkpoint, How’s Your Withholding?

It's a good idea to just make sure that you are withholding enough tax from your paycheck.

It’s a good idea to just make sure that you are withholding enough tax from your paycheck.


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 with 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.

Scam of the Month Club

Scam of the Month Club

One of the things I like about summer is that I have more time to catch up on my reading.   Not just my summer beach novels, but my business related journals as well.  During tax season, I basically read what I have to and get back to work.  In the summer, I have time to read about all the new laws and new tax proposals and have time to really absorb the information.

There’s a whole hierarchy to the newsletters I receive:  1.  Important and relevant–those that come from my professional organizations or the IRS itself.  I pay for the privilege of getting this information and so I read it immediately.  2.  Other legitimate tax information services–there’s a wealth of information out there.  I can’t read it all, but in the summer, I like to catch up.   And 3, the group that I consider to be the “scam of the month club.”   I’m guessing that doesn’t need much explanation there.

One of the necessary evils of my job is going through my spam folder.  Occasionally I receive legitimate business mail that gets diverted to spam, so I have to sort through it.   Of course, my spam folder is where I usually find my tax scam of the month.    Now to be honest, most of the spam is so obvious that I don’t even bother to open it, but sometimes it’s kind of fun to look at.

For example:  “Write-off your Rolex, We’ll Show You How!”   No, don’t even try it.  It’s not a legitimate business expense.

One that’s been popular this year,  “Never Pay Taxes Again, it’s  Unconstitutional!”  Actually, that argument is a little old.  The income tax was declared unconstitutional in 1895.  In 1909 Congress proposed to make it part of the Constitution and it was ratified as the Sixteenth Amendment in 1913.  The government has had a right to collect an income tax for almost 100 years.

One that caught my eye the other day was “Tax Deductible Cruise.”   That one was intriguing because, to be quite honest, there are some cruises, or portions thereof, that can legitimately be claimed as tax deductions.   But, there are a lot of things out there that aren’t.

For one thing, you cannot deduct the cost of a cruise (or any other type of travel for that matter) to attend one of those investment related seminars.  You can only deduct travel related to your trade or business.  Just because the promoter of a convention says it’s tax deductible, doesn’t mean it is, you have to go by tax law.

That said, there are times when you can legitimately combine your business trip with personal travel and claim a deduction.  For example, the IRS is holding one of it’s National Tax Forums in Orlando this summer.  The IRS Forums are a very legitimate deductible expense for me.  If I spent an extra day down there visiting my good friend, Mickey Mouse, my trip would still be deductible.  I couldn’t deduct the hotel cost for the extra day spent at Disney World, but the travel costs for the trip would still be written off.

There are even some times when you may even be able to deduct that cruise, or maybe part of it, for business.  The key of course is legitimacy and excellent records.  (That’s both, not either/or.)   Legitimacy meaning that you have a real business purpose relating to that cruise.  And by record keeping, I mean that you substantiate the amount of money you spent, the time you spent it, the place and business purpose of every expenditure.  And you do it while you’re on the cruise, or right after, not six months later in your accountants office while doing your taxes.  You can pretty much guarantee that deducting a cruise as a business expense is going to get a thorough review by the IRS.  Your best defense is to have flawless records.

If you’ve read about some tax idea on the internet and you’re wondering if it’s true or not, get a professional opinion.  You certainly don’t want to miss out on a valuable opportunity, but you don’t want to be duped either.  Many scams have some point of fact in them to start with.  (Like the unconstitutionality argument, it was true back in 1895.)  You know the old saying, if it sounds too good to be true, then it probably is.