Tax Tips for the Unemployed

By Nancy Faussett, CPA
Publication date: 07/17/2009

It is especially important for anyone unemployed and currently looking for work, to be able to take full advantage of any deductible expenses when filing their tax return. While one usually thinks of job-related expenses as being deductible, there are also certain expenses relating to a job search that may also qualify for a deduction.

Whether or not you can take a deduction for job searching expenses depends on if you are looking for work in your current occupation or have decided to seek employment in a new field. The former may be deductible but the latter are not. To qualify for a deduction, you must be looking for work in the same trade or business. It is irrelevant, however, whether or not your job search is successful or whether or not you accept an offered position. It also doesn’t matter whether or not you are currently employed while searching; in fact, you may even be temporarily employed in some other industry while looking for a permanent job in your field.

Deductible Expenses

The following expenses incurred in a job search in your current field may qualify for a deduction:

• Fees charged by an employment or job placement service, including any fees charged for employment counseling and referral services,
• Fees for a resume preparation service,
• Copying fees and postage incurred to send your resume to prospective employers,
• Professional photographs and demo tapes (for those in the entertainment industry),
• Advertising,
• Telephone charges incurred when seeking work, and
• Travel and transportation expenses. This includes meals and lodging while away from home as long as the expenses on not considered lavish. It includes travel for the purpose of a job interview (to the extent not reimbursed by the prospective employer). Also, the purpose of the trip must primarily be for a job search and any personal activities must be only incidental. Otherwise, the travel expenses are not deductible. However, even if the travel expenses are nondeductible because the primary purpose of the trip is personal, this does not preclude the deduction of any actual costs incurred for the job search. The standard mileage rate may be used to calculate car expenses.

Nondeductible Expenses

There are certain other expenses that might be incurred during a job search that are not deductible:

• If you are searching for work and put down a deposit on a residence in the area where you hope to find a job and then later must forfeit that deposit, this is not a deductible expense.
• If you sell stock of your former employer and realize a loss, this is not deductible.
• Job search expenses are not deductible when looking for your first job. (For this reason, you might want to consider an internship in your chosen field during your last year of school to avoid this from happening.)
• A real estate agent’s commission on the sale of your house, in connection with a move to a new job location, is not deductible.
• If you are hired on a probationary basis with the understanding that the job could become permanent, none of the expenses incurred (such as travel, meals or lodging) are deductible.
• If too much time elapses between the end of your last job and the beginning of your job search (generally more than one year), you cannot deduct your job search expenses. For example, taking time off from the job market for several years to raise a family or go back to school will make future job searching expenses nondeductible. However, there are legitimate exceptions to this, such as if the time lapse is due to a disability. (Note that there is no similar restriction on the length of time spent job searching as long as the taxpayer can show a continuing effort.)
• If a military officer retires and searches for work in the private sector, such job search expenses are not deductible.

Miscellaneous but Important…

The following are important points to remember when deducting expenses for a job search:

• Job searching expenses are claimed as miscellaneous itemized deductions on Schedule A, Form 1040. Therefore, if you don’t itemize but use the standard deduction, no expenses may be claimed. However, even if you do itemize, the deduction may be limited. First, as miscellaneous itemized deductions, they are deductible only to the extent that they exceed 2% of your adjusted gross income (AGI). Furthermore, if IRS Section 68 applies, meaning your adjusted gross income is above a specified amount, all of your itemized deductions are reduced by the lesser of 3% of the excess of AGI above a specified amount or 80% of the itemized deductions otherwise allowable for the year. The specified amount for 2009 is generally $166,800 ($83,400 if married filing separately). The good news is that, unless extended, Section 68 won’t apply to 2010.
• If you take a deduction for certain job searching expenses and your new employer reimburses you, you must include in income the amount previously deducted. (For more information about this, see the article entitled The Tax Benefit Rule in the Individual Income Tax Articles category on this site.)  
• The costs of moving your personal residence in order to take a new job may be deductible under IRS Section 217.

In Summary

Key to deducting any expense incurred during a job search is whether or not you are seeking employment in your current occupation. If you are, many of your costs may be deductible, but only if you itemize your deductions on Schedule A. While your job search expenses may not be enough by themselves to qualify as a deduction, remember that if you have other qualifying miscellaneous deductions, you may then be able to deduct them if, when taken in the aggregate, they exceed the 2% limit.