The Tax-Deductible Job Search
My husband was unemployed for eight months in 2002. Can he deduct his job-hunting expenses -- even without receipts?
Whether or not job-hunting expenses are deductible depends on the type of job sought and the cost of the search, and whether or not you itemize your taxes. (Only itemizers are eligible for the deduction.) Unfortunately, this means many pavement-pounders will have this door slammed in their face. But if you qualify, take heart: Receipts aren't necessarily required.
Before we tackle the issue of receipts, let's review the job-hunting rules. The first requirement is that the job seeker must be searching for a position in the same field as the job he or she just left. So those looking for their first job and those seeking a new career are out of luck. How will the IRS know if you've changed fields or not? To be honest, it probably won't -; that is, unless you get audited, says certified public accountant (CPA) Ed Slott of Rockville Centre, N.Y. Needless to say, we don't recommend trying to pull a fast-one on the IRS.
The next requirement: the cost of the search plus the costs of other "miscellaneous itemized deductions" must exceed 2% of the taxpayer's individual or joint (if married) adjusted gross income for that tax year. Other deductions included in this 2% requirement: nonreimbursed business expenses such as dues paid to a union or other professional society, uniforms that aren't appropriate for wear outside of the workplace and courses taken to improve job skills. (For more on this, read IRS publication 529.) Pretty much any job-hunting expenses are potentially deductible -; such as the cost of printing and mailing resumes, phone calls to prospective employers, employment agency enrollment fees and travel expenses, which includes airfare, meals, cabs and car mileage at 36.5 cents a mile.
Where this may get a bit murky is with the part pleasure/part job-search-related expense. So writing off, say, a family trip to Florida with an interview on the side could be a little tricky. "You can't go to Disney World and say, 'Oh, by the way I went on a job interview while I was down there,'" says Slott. If you spent 20% of your time on a job interview and the other 80% taking photos with Mickey Mouse, you aren't allowed to deduct travel expenses to and from the area (since the trip was primarily personal). Instead, you can only deduct the expenses that were directly related to your job hunt while you were down there.
For those who've been unemployed for a while and have had few or no other sources of income (such as a spouse who brings home a healthy paycheck), beating the 2% threshold is certainly plausible. That said, qualifying taxpayers whose 2002 AGI is more than $137,300 ($68,650 if married filing separately) may have their deductions reduced. (For more information, check the instructions for line 28, Schedule A.)
And consider yourself warned: As the itemized deductions increase as a percentage of gross income, so does the likelihood of an IRS audit, says Fred Daily, a tax attorney and author of "Stand Up to the IRS." But don't panic -; only 1 in 172 people received an audit notice in 2001. And it's possible that even if the computer does select your return, a sympathetic IRS agent might just let your deductions go, says Tom Ochsenschlager, a partner in accounting firm Grant Thornton. After all, the job seeker's plight is quite common nowadays.
Still with us? Then let's talk receipts. For those who are eligible for job-search deductions, having receipts obviously makes things easier. So those who are currently unemployed and hoping to deduct expenses on their 2003 taxes should be sure to keep records. "You don't need to keep receipts of every nickel and dime, but keep track of it in some kind of a book or diary," says Slott.
But for those who haven't done so, Uncle Sam has left a small door open: You can estimate. Under the so-called "Cohan rule," if an audited taxpayer doesn't have records for deducted business expenses (those include job-hunting costs), he can approximate, provided he has a reasonable explanation for the expense and why records aren't available. So if you tossed the McDonald's receipts from your interview trip, a rejection letter that shows you were present at an out-of-state location for that particular time-frame might suffice, Ochsenschlager says. The Cohan rule has one important exception -; it can't be used for travel or entertainment expenses, says Daily.
For more on how to cut your 2002 tax bill, see our Tax Tips series and our Tax Guide.