Tax Deduction Rules for Job Searching Costs

Looking for a job or just want to change companies? If you stay in your same line of work, you might be able to claim those job searching costs as a deduction on your tax return.

This is a list of a few things the Internal Revenue Service wants you to consider:

1. The costs must be in the same line of work. So, if you’re a plant supervisor, the IRS won’t reimburse you because you want to be pastry chef now.
2. Bonus, you may deduct any fees paid to an employment agency or head hunter while searching for that new job.
3. Need to mail out resumes? Duplication fees, printer ink, postage, etc. are all deductible.
4. If you have travel expenses while looking for that new job, deduct it. Keep in mind, don’t take a vacation to Florida and try and hide it as job searching. However, if you can prove it was primarily for the employment search, go for it. Just don’t complain if you have supply proof during an audit.
5. Don’t deduct any expenses if you’ve been sitting on your butt for 9 months then all of sudden you read this and start saving recipes. I ain’t gonna fly. There can be no significant time between needing a job and looking for a job.
6. If you’ve not worked before, stop reading this. You can’t take any deductions. First time job seekers don’t qualify.
7. File for job hunting expenses as a miscellaneous itemized deduction. You only are allowed to claim the amount of your total miscellaneous deductions that go past 2% of your adjusted gross income.

The Internal Revenue Service today announced a simplified option that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

In tax year 2010, the most recent year for which figures are available, nearly 3.4 million taxpayers claimed deductions for business use of a home (commonly referred to as the home office deduction).

The new optional deduction, capped at $1,500 per year based on $5 a square foot for up to 300 square feet, will reduce the paperwork and recordkeeping burden on small businesses by an estimated 1.6 million hours annually.

“This is a common-sense rule to provide taxpayers an easier way to calculate and claim the home office deduction,” said Acting IRS Commissioner Steven T. Miller. “The IRS continues to look for similar ways to combat complexity and encourages people to look at this option as they consider tax planning in 2013.”

The new option provides eligible taxpayers an easier path to claiming the home office deduction. Currently, they are generally required to fill out a 43-line form (Form 8829) often with complex calculations of allocated expenses, depreciation and carryovers of unused deductions. Taxpayers claiming the optional deduction will complete a significantly simplified form.

Though homeowners using the new option cannot depreciate the portion of their home used in a trade or business, they can claim allowable mortgage interest, real estate taxes and casualty losses on the home as itemized deductions on Schedule A. These deductions need not be allocated between personal and business use, as is required under the regular method.

Business expenses unrelated to the home, such as advertising, supplies and wages paid to employees are still fully deductible.

Current restrictions on the home office deduction, such as the requirement that a home office must be used regularly and exclusively for business and the limit tied to the income derived from the particular business, still apply under the new option. 

The new simplified option is available starting with the 2013 return most taxpayers file early in 2014. Further details on the new option can be found in Revenue Procedure 2013-13, posted today on IRS.gov.

If you are itemizing the deductions on your tax return instead of claiming the standard deduction, you may be able to claim certain miscellaneous deductions. A tax deduction reduces the amount of your taxable income and generally reduces the amount of taxes you may have to pay.

Here are some things you should know about miscellaneous tax deductions:

Deductions Subject to the 2% Limit. You can deduct the amount of certain miscellaneous expenses that exceed 2% of your adjusted gross income. Deductions subject to the 2 percent limit include:

• Unreimbursed employee expenses such as searching for a new job in the same profession, certain work clothes and uniforms, work tools, union dues, and work-related travel and transportation.
• Tax preparation fees.
• Other expenses that you pay to:
  • Produce or collect taxable income,
  • Manage, conserve, or maintain property held to produce taxable income, or
  • Determine, contest, pay, or claim a refund of any tax.
• Examples of other expenses include certain investment fees and expenses, some legal fees, hobby expenses that are not more than your hobby income and rental fees for a safe deposit box if it is not used to store jewelry and other personal effects.

Deductions Not Subject to the 2% Limit.  The list of deductions not subject to the 2% limit of adjusted gross income includes:

• Casualty and theft losses from income-producing property such as damage or theft of stocks, bonds, gold, silver, vacant lots, and works of art.
• Gambling losses up to the amount of gambling winnings.
• Impairment-related work expenses of persons with disabilities.
• Losses from Ponzi-type investment schemes.
• Qualified miscellaneous deductions are reported on Schedule A, Itemized Deductions. Keep records of your miscellaneous deductions to make it easier for you to prepare your tax return when the filing season arrives.

There are also many expenses that you cannot deduct such as personal living or family expenses.

Time is crunching for you tax-time procrastinators. The fear of the IRS grim reaper is tapping at your window sill…time to get busy! Now you’re sitting there with your store-bought tax preparation software and your stack of receipts, property tax receipts, investment paperwork, W2s and 1099s and you are wondering “should I itemize or claim the standard deduction?”

According to the Internal Revenue Service, itemizing deductions is only possible if your total deductions exceed the standard deduction that non-itemizers can claim.

For the 2011 tax year, if you are either single or married but filing separately your standard deduction will be approximately $5,800. If you are married and you file your returns jointly or have a dependent then your standard deduction will increase to $11,600. If you claim head of household your standard deduction will then be $8,500. Your standard deduction may also be decreased if your annual income exceeds a certain amount.

See Top 10 Tax Deductions Often Overlooked for more information.

Got a note that you’re being audited? Fear not. Take a few deep breaths and then start getting prepared. You can be sure that educating yourself and following a few simple rules can make the process less painful.

Kinds of Audits

Some audits are worse than others. You can expect either:

• A correspondence audit, by mail, asking for a straightforward answer (by mail) on less complicated issues, such as proof of deductions
• An office audit, held in the IRS office, where you’ll be asked to produce receipts and other documents related to specific issues or
• A field audit, where the IRS agent comes to your home or place of business

Producing Financial Documentation

The IRS has the right to look at your financial records to see if you’ve reported your deductions, exemptions and credits accurately. But it’s to your advantage to:

• Ask questions of the IRS agent ahead of time to make sure you understand exactly what the IRS is looking for
• Provide only the documentation that’s being asked for and nothing more
• Organize the paperwork you turn over to the IRS so that the audit agent doesn’t have to go looking through stacks of unrelated documents and find something else that needs auditing
• If you’re missing receipts or other documentation, try to reconstruct the information as best as you can, based on other documentation

Preparing for an Audit

There’s a lot you can do ahead of time to get ready for an audit:

• Consult with a tax attorney or certified public accountant to understand the issues the IRS in focusing on
• Thoroughly review IRS Publication 1, the Taxpayers’ Bill of Rights, which should have come with the notice you receiving saying you were being audited
• Research the issues on the IRS web site, www.irs.gov
• Discuss the situation with the professional tax preparer that helped you with the return(s) in question, and decide whether he or she should be present with you in the audit
• Don’t hesitate to ask for a postponement of the audit, if you need more time to round up records

During the Audit

Many lawyers advise having a lawyer or certified tax professional represent you during the audit instead of going yourself.

If you’re going to be present during the audit:

• Don’t volunteer information of any type
• Answer questions as concisely as possible
• Don’t lie
• If you sense things aren’t going well, don’t hesitate to stop the audit to consult with a tax attorney or accountant before continuing
• Ask to speak with the audit agent’s supervisor if you think the agent isn’t being fair

The IRS must complete an audit and give you an examination report within three years of the time you filed the return.

Appealing Audit Results

Most people owe something after an audit. If this happens, there are things you can do if you can’t pay the entire tax bill that you owe after the audit.

• Meet with the auditor and/or his supervisor to discuss the process and results and see if they’re willing to bend a bit to avoid an appeal
• Appeal the audit results to the IRS Appeals Office
• Take an appeal in Tax Court

Appealing your case within the IRS or to Tax Court will often net you some savings (although seldom a complete victory) and buys you time to figure out how you’ll pay the ultimate tax bill. Unfortunately, interest continues to build on the amount owed while you’re appealing. An appeal within the IRS may uncover issues not spotted by the initial auditor. Instructions for appealing an audit result should come with the examination report, but you can also find this information at your local IRS office.

Questions for Your Attorney

• I received a notice from the IRS, what should I do?
• I have lost some of my receipts for items that I claimed deductions, can I use bank statements?
• What information do I have to give to the IRS field agent?

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