More than 20% of American workers said they planned to change jobs last year, according to a survey by CareerBuilder. If you're one of the millions of people in this group, you may be entitled to a lucrative tax deduction for your job search expenses. Here's what you need to know about this deduction, and how much money it could put in your pocket at tax time.
The job search tax deduction and what expenses qualify
The IRS allows you to deduct certain expenses related to a job search in your current occupation. "In the eyes of the IRS, job hunting is not really job hunting unless you are looking for a position in the field you've already been working in. Costs associated with a career change are not deductible," says Dave Du Val, vice president of TaxAudit.com.
If you're unhappy with your teaching position and leave in order to find another one, for instance, your expenses can be deductible. But if you decide teaching isn't for you anymore and look for a job in restaurant management, your expenses won't qualify.
"This rule applies to new college grads and others who are looking for a job for the first time" says Du Val. In other words, you need to have an established occupation in order to qualify. And the IRS says that there cannot be a "substantial break" between the end of your last job and when you began looking for another position. This last point is somewhat open to interpretation, but if you quit your job in order to stay home with your children, and then decide to look for a new job several years later, you can't use the deduction.
Also, in order to deduct job search expenses, you need to itemize deductions on your tax return. If your job search qualifies, there are certain expenses you can deduct. The IRS lists the following three categories of eligible expenses:
- Any employment agency fees you pay -- including fees paid to job recruiting websites and job search coaching fees.
- Costs of preparing and sending your resume to prospective employers -- Few people actually mail their resumes anymore, but you can still deduct the cost of printing them.
- Travel and transportation expenses -- This is potentially the most lucrative of the three. If you travel for the primary purpose of looking for a new job, you can deduct the expenses of traveling to and from the area. For driving expenses, the IRS allows you to deduct $0.555 per mile traveled, so if you end up driving a total of 500 miles in your job search, this alone could entitle you to a $277.50 deduction.
Be careful -- there are some "job search expenses" that you can't claim
Unfortunately, some expenses associated with searching for a new job aren't deductible. Here are just a few examples, according to Du Val:
- Business attire, since it's suitable for everyday use
- Haircuts and other grooming expenses in preparation for an interview
- Travel expenses (if the primary purpose of the trip is personal or vacation)
- Expenses when searching for your first job
- Expenses related to looking for a new occupation (career changes)
Even with these limitations, the deductible expenses from a job search can be quite substantial, and could mean a boost to your tax refund, as we'll see in a minute.
How much is it worth?
It depends how much your qualified expenses are, and how much your other deductions add up to. Job search expenses are claimed under "miscellaneous expenses" on Schedule A, and the deduction is limited to the amount of miscellaneous deductions that's in excess of 2% of your adjusted gross income.
Also included in the miscellaneous deductions category are:
- Unreimbursed employee expenses -- including dues to professional societies, home office expenses, licenses and regulatory fees, tools and supplies used for work, union dues, and other such expenses. Job search expenses fall into this category.
- Tax preparation fees -- If you paid an accountant to do your taxes, or purchased a software program such as TurboTax, you can deduct the cost.
- "Other expenses" -- This broad category includes fees and expenses related to your investments, repayments of social security benefits, safe deposit box rental, and others. For the complete list of miscellaneous deductions, refer to IRS publication 529.
If your AGI is $50,000 for this year, and your miscellaneous deductions add up to $2,500, you can deduct $1,500 of them ($2,500 minus 2% of your AGI). In other words, the potential value of this deduction depends on how much you earn, and how much you spend on deductible items.
Be sure to save your documentation
The IRS tends to take a closer look at returns that claim higher-than-average deductions, so make sure you keep good records and receipts for your qualifying expenses. While you should never let the fear of an audit prevent you from claiming a legitimate tax break, it becomes more important to be able to back up the information on your return.
The deduction for job search expenses could potentially put hundreds of extra dollars in your pocket, so keep track of what you spend, and you may be in for a pleasant surprise when tax time rolls around.