It’s happened to many of us at one time or another—the dreaded job loss. While
you can’t always prepare for it, when it happens it is important to understand the
tax implications of a job loss–and how you can save on your taxes with your job search efforts. Here is our best expat tax advice for those who have unfortunately
lost their job.
What Income is Taxable?
First off, it’s important to understand what post-job income is taxable.
Severance Pay—Your employer will include any severance pay on your W-2, so it is taxable in the year that you receive it.
Vacation/Sick Pay—Any unused vacation or sick time that you receive compensation for is considered part of your wages, and will be taxable (again, your employer will include this on your W-2).
Unemployment Compensation—If you worked for a company based in the US, you maybe eligible for unemployment compensation. This would depend on certain factors, including whether or not your employer was paying into unemployment on your behalf. If you do receive it, it will taxable. You may choose to have 10% withheld for Federal taxes to avoid the hit on your Federal Tax Return.
Tax Deductions for Your Job Search
Once you start looking for a new job, it’s time to get organized! You will want to keep close records of all your job-searching activities, as many are tax deductible. Let’s take a closer look at what you may deduct from your Federal Tax Return.
Resume costs—If you hire a professional to create a resume for you, you can deduct these costs! In addition, you can also deduct the costs of mailing your resume to prospective employers.
Travel expenses—Many people find it necessary to look outside their current geographic area in order to find another job opportunity. The good news is your travel should be deductible! You can deduct the costs of travel to and from the area, however the main purpose of your travel must be related to the job search. You can choose to use the standard mileage rate (which is $.56 per mile in 2013) to figure car expenses.
Placement Agency fees—If you employ the services of a job placement agency, the fees you pay may be deducted from your Federal Tax Return. If your new employer reimburses you at a later date for the fees you paid, you must include that amount in your gross income, up to the amount of your tax benefit in the prior year.
Legal fees—If you paid any legal fees in an effort to keep your job, these fees are deductible.
As you might expect, there are some stipulations when it comes to tax deductions relating to your job search.
You must be searching for a job in your present occupation. If you are looking to switch to a different career path or occupation, your job search expenses are not deductible.
You cannot be searching for a job for the first time.
The total amount you spend on the job search must exceed a certain threshold. Job search expenses are reported on a Schedule A, Itemized Deductions (as it is claimed as a miscellaneous itemized deduction). The amount that exceeds 2% of your adjusted gross income is deductible.
If you took some time off after your job loss before you began searching for a new job, you will not be able to deduct job search expenses. The IRS doesn’t specify the exact amount of time—the official wording cites a ‘long break’ as one that renders your job expenses non-deductible.
Any costs that are reimbursed are not deductible.
Experiencing a job loss can be very stressful, but preparing for the possible taxes and understanding how you can also save on your taxes can make it just a little bit easier!