The following is a post by MPFJ staff writer, Kevin Mercadante, who is a freelance professional personal finance blogger for hire, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
Job hunting expenses are one of those tax deductions that are often forgotten, even at tax time. The problem is often either that the expenses are not particularly high, or that they’re not high enough to reach and exceed the IRS threshold beyond which they become tax-deductible. That’s why it’s good to review the tax deductibility of job hunting expenses from time to time.
Job hunting expenses can only be deducted if you itemize expenses on your income tax return. They are reported on Form 1040, Schedule A as a miscellaneous deduction (yes, you must itemize to deduct most job hunting expenses). You can deduct them even for jobs you don’t actually land.
If you have particularly large job hunting expenses, such as those related to an out-of-state job search, they could be significant and rise to the level of an important tax deduction.
Which job hunting expenses are tax-deductible?
Administrative Job Hunting Expenses
These are the more typical job hunting expenses, and can include:
- Third party resume preparation
- Printing and postage
- Paid phone calls
- Career counseling costs
As a rule, you will only be able to deduct expenses that are paid directly to a third-party provider. Unfortunately, this means that you will also be unable to deduct expenses for the pro-rata cost of making phone calls on your cell phone plan.
As is always the case with income tax deductions, make sure that you keep copies of invoices and payments for any expenses you incur. You can only deduct what you can prove, and that will require a paper trail.
Third Party Fees
Third-party fees are also deductible under job hunting expenses, although it is pretty rare for an employee to pay these. They would include job placement fees paid to recruiting firms, however these are customarily paid by employers, and not by employees. Though for the record, for my first job taken out of college, I did get stuck paying half of a placement fee due to the fact that I graduated into the middle of a wicked recession. So it is possible under certain circumstances you may end up paying for it.
There are also instances in which you as the employee will pay the placement fee, however it will be reimbursed by the employer if you remain employed with them for a certain minimum amount of time. If the employer does reimburse you, the fee will not be deductible by you. And if you do deduct payment of the fee one year, any reimbursement coming in subsequent years will need to be reported as income.
Travel and Transportation Expenses Related to the Job Search
This is where you are most likely to see the most significant – and deductible – job hunting expenses. You can deduct expenses related to the cost of travel, whether you are doing so locally or for out of town interviews.
Deductible expenses include:
- Travel expenses, like air fare
- Car rental fees
- Auto mileage (56 cents per mile for 2014)
- Baggage fees
- Hotel and lodging costs
- Connecting and local transportation (trains, subways, buses, cabs, etc)
When deducting these expenses, you must be sure that they are incurred primarily for job hunting purposes. If you travel to Orlando to go to a job interview, and then end up spending the rest of the week at Disney World, it is entirely possible that the IRS will overturn your deduction on audit based on the fact that the trip was primarily taken for pleasure and not for job hunting purposes.
Relocation Costs
Relocation costs can be the most significant income tax deduction that you can get as a result of a job search. In order to deduct moving expenses on your tax return you must meet three tests:
Your move is closely related to the start of work. Per the IRS, the move must be “incurred within 1 year from the date you first reported to work at the new location.”
Time. If you are an employee, you must work full time for at least 39 weeks during the first 12 months after moving to the new location. The requirement for self-employed persons is 78 weeks.
Distance. There is a 50 mile rule in order for you to be able to deduct relocation costs. The new location must be at least 50 miles farther from your former home than your old main job location was from your former home. For example, if you lived 20 miles from your old job, you will have to move at least 70 miles from your current home in order for the cost of the move to be deductible.
The advantage with moving costs is that you don’t have to itemize in order to deduct them, nor are they subject to the 2% of AGI reduction (that we’ll discuss below). You can actually deduct them on Page 1 of Form 1040, which will also lower your AGI for other deduction purposes.
Relocation costs can be a lot more complicated than time permits us to present here. Please see IRS Publication 521 for a more in depth description of what relocation expenses are allowed, as well as consideration of the many special provisions within the allowance.
Your Job Hunting Expenses Are Subject to Reduction!
According to IRS regulations, you can only deduct job hunting expenses to the degree that they exceed 2% of your adjusted gross income (AGI). If your AGI was $100,000 for the tax year, you will only be able to deduct job hunting expenses to the degree that they exceed $2,000, or 2% of your AGI.
The good news is that there other expenses that count toward the 2% threshold, including tax preparation fees, investment related expenses, and un-reimbursed employee business expenses. You may find yourself exceeding the threshold very easily if you have other such expenses, or if you are unemployed for much of the tax year, so the threshold will be an extremely low number.
Per the IRS:
You cannot deduct these expenses if:
- You are looking for a job in a new occupation (more on this in the next section),
- There was a substantial break between the ending of your last job and your looking for a new one, or
- You are looking for a job for the first time
Sources: IRS Publication 529, and Job Search Expenses Can be Tax Deductible
And that isn’t the only limit either…
You Can Only Deduct Job Hunting Expenses Related to a Job in the Same Career Field You’re Already In
If the 2% of AGI limit doesn’t seem fair, it gets even worse. You cannot deduct job hunting expenses if they are for the purpose of moving into a different career. The deduction applies only if you are moving to a job within the same career field.
This doesn’t make a whole life sense, considering you are more likely to occur large job hunting expenses if you are looking to move into a different field. After all, that would likely involve sending out more resumes, going on more interviews, and a greater likelihood of extending the job search to other states.
But perhaps that’s the reason why this restriction exists – the government is looking to minimize the loss of tax revenues related to the more costly job hunt that would be involved if you are moving into an entirely different career.
It gets worse still. If you are a recent graduate searching for your first job, the expenses you incur will not be considered deductible because – technically speaking – you are moving into a new career.
Despite the limitations, job hunting expenses may be worth paying close attention to in the event that you have a very low income in the year that you’re claiming them, or they are mostly comprised of moving expenses, or if the total amount is substantial.
How about you all? Have you ever been able to deduct job hunting expenses in the past?
Share your experiences by commenting below!
***PHOTO: https://www.flickr.com/photos/ftmeade/14675342103/sizes/n/
