What Unemployment Does to Your Taxes

Job-Seeking Expenses

If you itemize your deductions on your tax return, you can deduct job-seeking expenses as a “Miscellaneous Expense” on Schedule A. You can claim fees paid to employment agencies, executive recruiters and other consulting forms (i.e. headhunters) for securing a job, preparing a resume or career counseling, the cost of typing, printing and mailing resumes, telephone calls to set up interviews, newspapers and periodicals bought for employment ads, ads placed in the “positions wanted” section of the classifieds and round-trip travel or transportation to job interviews, including lodging and 50% of meals if you’re away from home overnight. If you drive to interviews you can deduct 51 cents per mile from January through June, and 55.5 cents per mile from July through December.

Expenses to look for work in a new trade, profession or field are not deductible, however. For example, as an accountant I cannot deduct expenses incurred while looking for a job as a day laborer. You do not have to actually get a job to be able to deduct the expenses, though.

You will only be able to deduct job-seeking costs on Schedule A to the extent the total Miscellaneous Expenses exceed 2% of your AGI.

Breaking the Piggy Bank

Do not be tempted to take a distribution from a tax-deferred retirement savings account, such as an IRA or a 401(k), to “tide you over.” The distribution may be fully taxable and, if you are under age 59.5, you may also be subject to a 10% penalty. Between federal and state taxes and the premature withdrawal penalty, you may end up paying more than 40% of the distribution to the government.

I remember back in the 1980s when several clients, members of the ironworkers union, took premature distributions from their union retirement plan when there was little or no work available. The federal tax withheld, usually 20%, did not cover the total tax and penalty costs, and the clients ended up taking more money from the plan to pay the additional taxes, resulting in more tax and penalty on the next year’s returns.

Taking a taxable distribution from a retirement plan can also cause you to reduce or wipe out any Earned Income Credit and reduce the amount of deductible job-seeking expenses.

You may be able to borrow from your 401(k) plan if the plan allows, but you must pay the money back according to the terms of the plan or be subject to tax and penalty. You cannot borrow from your IRA, but you can take a distribution and avoid tax and penalty if you roll it over to another IRA within 60 days. If you miss the 60-day deadline, however, you will be subject to tax and penalty.

You may avoid the 10% premature withdrawal penalty on a distribution from an IRA if the money is used to pay for health insurance coverage if unemployed, medical expenses in excess of 7.5% of your AGI, or higher education expenses.

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