Ines Zemelman, EA 10-Oct-14
If you have lost your job and are actively seeking gainful employment, you may be able to deduct the expenses associated with your job search. You must be aware, however, of the taxes for which you will be liable.
Almost everybody who’s ever been employed has experienced the dreadful shock of losing a job. Sometimes, the loss of a job is foreseen and plans can be made ahead of time. More times than not, however, a job is lost before adequate preparations can be made. If you have suddenly lost your job, it’s important for you to know the income on which you will be taxed and the activities during your job search that you may be able to deduct.
Just because you lost your job, it doesn’t relieve you of the obligation to pay taxes on income you received and are yet to receive through unused vacation time, severance pay, or unemployment compensation.
Sometimes when a company terminates employment, a severance package is offered. If you received severance pay from having been terminated or laid off, that income is taxable. If there are unused vacation days or sick time and you received or will receive compensation for these days, this is also considered taxable income. Both of these types of income will be reported on the W-2 Form sent to you at the end of the tax year by your employer.
Please note - tax treatment of your severance pay in your host country has no bearing on your U.S. tax obligations (for example the first 30,000 GBP of redundancy payment are tax-free in the UK). However - severance pay counts towards the Foreign Earned Income Exclusion, so you may not have to pay any U.S. tax on it anyway.
Most companies in the United States pay into the Unemployment Compensation Program on their employees’ behalf. In most circumstances, an employee is entitled to receive Unemployment pay once he has been terminated. There are situations in which an individual may not be eligible to receive Unemployment compensation. If you do qualify to receive Unemployment distribution, you will have to pay taxes on this income. You may elect to have 10% of your Unemployment payments withheld to minimize the tax burden at the end of the year.
If you meet a few conditions on your job search, you will be able to deduct the cost of all your job search activities from your US income tax return. If you are looking for a job for the first time in your life, your job search expenses are not deductible.
In order to deduct your job search expenses, you must be seeking employment in the same career category as the job you lost. If you are searching for a job in pursuit of a different career path, your job search expenses are not deductible.
If your job search expenses do not total at least 2% of your gross income, you will not be able to deduct them. The amount you spend in excess of 2% of your gross income is deductible and reported on Schedule A.
You must begin searching for a job right away after having been terminated. While the IRS is ambiguous on the time requirements, it stipulates that a ‘long break’ will render you ineligible for job search deductions.
If you are reimbursed for your job search expenses by an employer, an agency, or any other source, you may not deduct them from your US expat tax return.
There is a list of job search expenses you may deduct, so it’s imperative to keep track of the money you spend searching for a new job.
Once you begin looking for a job, make sure to keep track of the time and money you spend searching for gainful employment. The following expenses are deductible if you qualify to claim job search deductions:
●The cost of your resume: The cost to hire a professional to help prepare your resume is deductible on your US income tax return. Also, if you mail your resume out to prospective employers, you may deduct all the associated expenses.
●The cost of travel: If you are searching for a job outside of the area in which you live, this deduction can be extremely valuable. In order to deduct the cost of travel, the primary purpose of your commute must be to search for a job. To claim your travel expenses, use the mileage rate established by the IRS ($0.56 per mile in 2014).
●The cost of placement agencies: Many people enlist the services of job placement agencies to help them secure employment. If you use one or more job placement agencies, the money you spend is deductible. If you find an employer who is willing to reimburse the money you spent with your job placement agency, you will be required to report these reimbursements as gross income on your US income tax return.
●The cost of legal expenses: If you paid for legal services enlisted to help you keep your job, you may deduct these expenses.
The experience of losing a job can be stressful. With proper planning and diligent record keeping, however, you can minimize the impact that the loss of your job and the expenses of finding another one have on your life.