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Write Off Your Job Hunt!

It's no secret that millions of Americans are looking for work, from recent graduates to downsized late-career employees who aren't ready to retire. Far fewer are aware of how Uncle Sam's tax code can be used to blunt the cost of a job search-especially one that may go on for longer than in the past. The tax issues affecting job seekers are numerous, with many parts of the code coming into play. The bottom line: Getting tax help is a wise move for job hunters. "Even a little goes a long way, and a quick phone call could save you a lot of money," says Melissa Labant of the American Institute of CPAs.

For more on this story, see our MB Tax Blog.

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October 17th is the final day to file 2010 taxes for Individuals and LLC's. If you are on extension and have the items needed to file your 2010 taxes, please get that material to us and we will do our best to process the returns in the order that we receive completed information. The penalty for not filing on time is considerably more than not paying on time, so our best advice is to have your taxes filed on time, even if you have to create a payment plan for your payments. Our office hours through October 17th are Monday-Friday, 10am-5pm. You are welcome to drop off your material through our front door slot if we are not in the office, email scanned information tooffice@mbtaxpro.com, or you may fax us your information to (503) 282-0513. We hope to see you soon!

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ImportantDates
Important Dates

October 17th - Deadline for Individual Tax Returns

Thursday, September 29, 2011

Write Off Your Job Hunt!

reprinted from The Wall Street Journal

It's no secret that millions of Americans are looking for work, from recent graduates to downsized late-career employees who aren't ready to retire.

Far fewer are aware of how Uncle Sam's tax code can be used to blunt the cost of a job search—especially one that may go on for longer than in the past.

Judi Lacko, a 45-year-old CPA from Denver who has been actively searching for work as a chief accounting officer for months, says, "Looking back, I wish I had thought right away about deductions and record-keeping."

Harry Campbell

Career coaches usually don't help with taxes. "My job is to get my clients back to work as quickly and efficiently as possible," not to dissect deductions, says Win Sheffield, a career coach in New York who is part of a network called the Five O'Clock Club.

The tax issues affecting job seekers are numerous, with many parts of the code coming into play. They also are tricky. One key provision—the "miscellaneous deduction"—can severely limit job-hunting write-offs, while another—the "alternative minimum tax"—denies them entirely.

But there are opportunities, especially for people who can earn some income in a side business. "By starting a consulting practice, taxpayers may convert limited write-offs into full deductions," says David Kautter, who heads the Kogod Tax Center for Small Business at American University.

That's what Steven Milewicz has done. Mr. Milewicz, 50, was the general counsel for a large construction company until this summer. While looking for his ideal permanent position, he is doing contract work for a law firm specializing in construction. "I can take a full deduction for our health-insurance premiums, plus other expenses," he says.

The bottom line: Getting tax help is a wise move for job hunters. "Even a little goes a long way, and a quick phone call could save you a lot of money," says Melissa Labant of the American Institute of CPAs.

Hit or 'Misc'

The first place many job-hunters look for write-offs is the miscellaneous deduction, which includes unreimbursed employee expenses and applies to the recently unemployed as well. It is the go-to slot for deducting travel, entertainment, subscriptions, business cards and other costs.

There is a problem, however. Permitted expenses are deductible only to the extent that they exceed 2% of a taxpayer's "adjusted gross income," which is income minus a few items. On a $200,000 income, that's $4,000.

This is "a killer" if the job hunter has a working spouse, large severance or other income, says Bob Meighan of Intuit's Turbotax team. (Expenses must be deducted in the year incurred.)

If the taxpayer falls into the alternative minimum tax, which was designed to tax the wealthy by limiting deductions, there isn't any writeoff at all. This is often a problem in high-tax states.

There's another limit, too. Job-hunting expenses can count as miscellaneous deductions only if a taxpayer is looking for work in the same occupation. That rules out writeoffs for students looking for a first job, or an accountant who wants to become a screenwriter.

The rule's boundaries are fuzzy, however, and Mr. Kautter says there's room for imagination. If an engineer who managed a couple of people is looking for a pure management job, she could reasonably claim that she was and will remain a manager. But sometimes the IRS takes a hard line.

Go Sole

Fortunately, there's a better route for job-seekers who can earn some income: set up a sole-proprietorship business reported on Schedule C of the tax return. Here taxpayers may fully deduct many "ordinary and necessary" costs of doing business.

[24jobbreaksJA] Harry Campbell

As a result, deductions for home-office, business-card, travel or résumé-preparation expenses that otherwise would be limited are fully allowed now—as long as the costs are matched against income you'll claim on Schedule C. And there isn't a requirement to stick with your former occupation.

Example: If a lawyer wants to become a chef, he can't claim job-search costs as a miscellaneous deduction. But if he sets up a Schedule C business as a chef and finds a temp job or two, he can deduct his knives and business cards while also looking for a full-time job.

Downsides

The biggest problem with this strategy is that you need income. The IRS frowns on losses from businesses unless they show a profit in at least three years out of five. But even a small profit opens the door to many deductions.

Another issue: business owners must pay both the employer and employee share of payroll taxes on net income—currently 13.3%—and file quarterly tax returns. "People used to getting a paycheck where taxes are withheld are often shocked by this," says Ms. Labant of the American Institute of CPAs.

Winning a client's IRA account may be the key to becoming their lead adviser. Plus, annuities aren't for everyone. And, a look at investing in water. Dow Jones Wealth Adviser's Veronica Dagher reports.

What if you find a full-time job? Nothing prevents a taxpayer from being both an employee and the owner of a Schedule-C business, notes Mr. Kautter. Many employees have consulting businesses on the side.

Record Keeping

One more caveat for job-seekers who plan to take deductions of any type: Get serious about record-keeping. The IRS is a stickler about this.

Mr. Milewicz tucks his receipts into envelopes, and then enters them on a spreadsheet. You don't have to go quite that far, but consider devoting a notebook or diary to your effort, and save receipts. Many an audit or court case has been won on the strength of good records.

Tax Tips

Now for more specifics on the tax treatment of everything from severance pay to home-office expenses. See also IRS Publication 4128, Tax Impact of Job Loss.

• Income. Part of leaving a job is figuring out which of a variety of new income sources—severance pay, unemployment, income from investments—is subject to tax.

Severance pay is taxable, as is accumulated vacation or sick pay, but the former employer is supposed to withhold federal and state taxes. Unemployment pay also is taxable. (Part of it wasn't in 2009, but the provision lapsed.)

Withholding for unemployment isn't automatic, however, and many taxpayers forget this fact. To avoid getting caught short at tax time, file IRS form W-4V with your state. Tax will be withheld at a flat 10% rate.

Those whose income drops significantly also may be newly eligible for "refundable" credits such as the Earned Income Credit or the Additional Child Credit, which provide a refund even if tax isn't owed. See IRS Publication 525.

If your former employer pays employment- and outplacement-agency fees, they don't count as income to you. If you pay these expenses, they count as miscellaneous deductions.

• Investments. There's good news for people who are between jobs and tap investment funds. Those with taxable incomes of less than $34,500 for single filers or $69,000 for joint filers pay no tax on long-term capital gains or qualified dividends. So if you must tap your accounts, at least you don't have to pay Uncle Sam.

Retirement plans. Many ex-employees make tax-free rollovers of their 401(k) plans into an individual retirement account after they leave a company.

One reason to think twice: Withdrawals from regular IRAs are taxable and also are subject to a 10% penalty if the taxpayer is younger than 59½, except in certain circumstances. But those 55 and older who leave a company can cash out a 401(k) plan and skip the 10% penalty that would apply if the assets roll over into an IRA, says Natalie Choate, an expert with Nutter, McClennen & Fish in Boston. (Tax is still owed.)

Other exceptions to the 10% penalty: some tuition payments; medical insurance premiums for some unemployed workers; and medical expenses if they are greater than 7.5% of adjusted gross income.

With a Roth IRA, the account owner may withdraw his or her own contribution free of income tax. But the 10% penalty (and exceptions) mentioned earlier applies if the account was converted from a regular IRA within the previous five years. And if you withdraw Roth earnings—as opposed to principal—before age 59½, both income tax and the 10% penalty may apply. Keep good records.

For more information, see IRS Publication 590.

• Medical expenses. This is a crucial issue for many. Unreimbursed medical expenses (which include insurance premiums) are deductible only for those who itemize, and only to the extent that they exceed 7.5% of adjusted gross income (or 10% if you are subject to alternative minimum tax). With income low, it may be easier than usual to get over this high hurdle.

People trying to take this deduction should consult IRS Publication 502 for a list of allowable expenses, which is much broader than the costs many insurance companies reimburse. Examples: contact-lens solution and breast-feeding equipment qualify; health-club memberships usually don't.

For taxpayers who set up a Schedule-C business, health-insurance premiums may be fully deductible, as Mr. Milewicz noted. See the instructions to Form 1040.

Home offices. Deductions for a home office, including supplies and equipment such as a computer, may get a better break if taken on Schedule C, whereas they will be limited if they qualify as miscellaneous expenses.

To be deductible, a home office usually must be used exclusively and regularly as a principal place of business. (No weekend football-game watching or kids doing homework.) Appropriate services and supplies—business cards, resume preparation, cell phone, professional fees—for the business or the job hunt are often deductible as well.

Equipment, such as a computer, may need to be depreciated over time. If there is personal as well as business use, expenses may have to be allocated between the two. For more, see IRS Publications 587 and 946.

• Travel and entertainment. Finding work, permanent or part-time, often requires prospecting near and far. As with home offices, qualified travel and entertainment deductions often get a better break on Schedule C.

The rules are fuzzy, but job seekers who want to deduct travel would do well to spend more than half their time looking for work while they are traveling. (Travel time also counts as work.) Thus for many, evenings or weekends aren't part of the equation.

For drivers, the IRS allows 55.5 cents per business mile, or else actual costs such as depreciation, gasoline and maintenance. Taxpayers who want to go the latter route should probably seek expert help, because this quickly gets complicated, especially if there is personal use involved.

What about meals and entertainment? The allowed deduction starts with 50% of their cost, and you should keep excellent records—say, a short note as to what was discussed—in case IRS agents come calling. For more, see IRS Publication 463.

• Education. Would more education help a job search? For those without a college degree, the most useful tax break is likely to be the American Opportunity Tax Credit, which can be claimed even if you don't have income.

What about graduate or professional-enrichment courses? At least nine benefits exist, all with different requirements and income limits.

Two of the most commonly used are the Lifetime Learning Credit and the so-called Tuition and Fees Deduction. For a useful chart comparing all tax benefits for education, see IRS Publication 970, Appendix B.

• Moving expenses. Unreimbursed moving expenses may be written off even if a taxpayer doesn't itemize deductions. But the new job usually has to be at least 50 miles away from the old one.

A taxpayer also must hold a new job for a certain period after a move, which differs depending on whether he or she is an employee or self-employed. For details, see IRS Publication 521.

• Don't even try. Kogod's Mr. Kautter says few if any taxpayers have ever gotten away with taking deductions for work clothing (except uniforms), a briefcase, commuting costs, dry cleaning, haircuts, cosmetics or cosmetic facelifts.

Write to Laura Saunders at laura.saunders@wsj.com