Tax planning probably isn't top of mind if you are busy with the holidays and a job search. But, it probably should be if you want to maximize your job search tax deduction and make the most of your job search during the remaining weeks of 2021. Here is what you need to know about job search costs and how to maximize your ability to claim tax deductions.
What the IRS Says
The IRS has lots of rules and guidance on taxes and tax planning. IRS Publication 529 outlines the requirements for tax deductions. Generally, you can claim certain job-hunting expenses when looking for a position in your existing profession or industry. However, you cannot claim these deductions if:
- You are looking to change careers
- A substantial amount of time has passed after the termination of your last job
- You are looking for a job for the first time.
The job-hunting deduction is available even if you do not land a new job. The types of job search costs you CAN deduct are:
- Costs of resume preparation including a resume writing service, printing, mailing costs
- Coaching, recruiting, and other employment or career development costs, and
- Travel and transportation costs if the primary purpose of travel is for job search.
What's the catch?
If you meet the criteria above, you still have to meet a couple of other requirements. First, you can only claim job search expenses as a tax deduction if you use itemized deductions on your tax returns. So, if you typically use the standard deductions, then you probably won't be able to deduct your job search costs.
You can find out which deductions you typically claim by looking at your returns from last year. However, people that have a life change (i.e. got married, had kids, bought a house) will switch their deductions and often look for new jobs. So, it will probably make sense to consult with your tax preparer about whether an itemized or standard deduction makes sense for you this year.
Do the Math Now
To make the most of your job search deductions, you will need to also factor in the adjusted gross income limit. Basically, this means that the expense of over 2% of your adjusted gross income (AGI) is deductible. The adjusted gross income isn't your total income. Instead, your adjusted gross income is the number after you deduct all of those acceptable deductions like student loan interest, 401k contributions, educator expenses, alimony, etc. Thus, your AGI is typically less than your total income.
All this tax stuff can be confusing in the abstract. So, think about this example. If your adjusted gross income is $50,000, then 2% of your AGI would be $1,000. So, any job search costs above $1,000 would be tax-deductible. Or, if you made $100,000, then your job search costs over $2,000 would be tax-deductible. Thus, the AGI floor can limit some people from claiming the job search deduction - especially if they try to do everything by themselves.
Track Your Expenses
To really understand if your expenses come close to the deduction threshold make sure that you have a log of all these expenses. If you don't have a log, then go back and build a spreadsheet to organize everything into a single place to figure out the total costs. You will need that information to give to whoever does your taxes. You may also want to consult with your CPA or tax preparer now to make sure that are planning out your tax strategy while you still can.
Make sure to include all of the expenses you have incurred when tallying your job search expenses. Remember, you can include all of the expenses on that list that fall into the following categories:
- Mileage for your job search, interviewing, career coaching, meetings, etc.
- Costs for professionally written resumes, cover letters, LinkedIn resume, etc.
- Preparations of additional resumes or cover letters tailored to specific jobs or companies;
- Expenses for coaching or preparation of your written answers to those additional job application questions;
- Costs for each of your career coaching sessions; and
- Any other costs that fall under the permissible categories.
When deciding how to proceed with your job search. Think about how to make your efforts start working for you from a job search and tax perspective. Your time is valuable, but the time you spend by yourself in your job search isn't tax-deductible. However, if you pay someone else to do some of these things for you, then you can probably claim them for your tax deduction.
And, paying someone who knows what they are doing will make a huge difference in the effectiveness of your job search. For example, a resume built by a professional resume writing service like The Contingent Plan land 2x more interviews and reduces the job search time by 40% on average. These professionally written resumes also land higher-paying offers than their DIY counterparts.
As the end of the year approaches, think about what you want out of your career in the new year. If the answer is a new job, then the time may be right for you to invest in your job search. The data shows that investing in your job search can land more job offers faster, but also higher compensation and a possible tax deduction. So, instead of taking a step back in your job search, invest in it and you will likely see huge returns in the new year.
Want to maximize your job search and possibly your tax credit? Schedule a free consultation with our team of proven experts today.