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So I Just Lost My Job. Can I Now Deduct My Job Hunting Expenses For Income Tax Purposes?

Article by Steve Moskowitz, J.D., LLM., Senior Partner and co-author Anthony Dsiodi, J.D., LLM., Senior Associate
Date Published Jan 2009 San Francisco Business Times

In these difficult economic times countless Americans have been forced to look for a new job. Many of our readers will be surprised to learn that their job-hunting expenses may be deductible for income tax purposes. However there are two limitations our readers should be aware of before claiming a deduction for job-hunting expenses on their tax returns. First, the expense must be associated in looking for a new job in your present line of work. But, the deduction may be allowable even if you do not find a new job. However, the associated expense of looking for a new job in a new trade or business, even if a job is found, is not deductible. For example, if an attorney sought a position as an elementary school teacher, his associated job expenses would not be deductible. On the other hand, if an attorney decided to seek a position in a law firm, his job-hunting expenses may be deductible.

The IRS has permitted deductions for the following job related expenses: 1) fees paid to employment agencies; 2) cost of mailing resumes; 3) legal fees related to reviewing an employment contract; 4) transportation costs to job interviews; 5) fifty percent of meals and entertainment expenses directly related to job search; and 6) out of town travel expenses including meals, lodging, and transportation, if the trip is primarily to look for a new job.

If you claim a job-hunting expense, you should be prepared to substantiate your expenses in the event of an IRS audit. As such, you should keep all of the receipts, which demonstrates you’re out of pocket expenses. In addition, you should keep a log or diary detailing your interviews, expenses, and entertainment costs. When claiming deductions on a tax return, there is no such thing as having too many logs and documentation. Keep in mind, if the IRS audits your tax return and questions your job hunting expenses, your receipts and logs will be the only things they review to support your deduction.

Second, our readers will need to understanding that job hunting expenses are classified as a so-called “below the line” deduction. This means that that job expenses are classified as an itemized deduction. An itemized deduction is limited to the extent that it exceeds more than two percent of a taxpayer’s adjusted gross income. In other words, job-hunting expenses will only be likely deductible only to the extent it totals more than two percent of your adjusted gross income. In addition, there are numerous other limitations, such as the Alternative Minimum Tax, which may reduce or entirely eliminate the deduction. Consequently, it is important that you consult with your tax professional before claiming a deduction for your job-hunting expenses.

For more information or if you have questions please use our contact form.


Date Published: Jan 2009 San Francisco Business Times

Recently, it was discovered that Bernard Madoff was operating a Ponzi scheme that victimized numerous high profile investors. A Ponzi scheme is a fraudulent investment operation that pays returns from money received by subsequent investors rather than from any profits or earnings generated from the venture. Such a scheme typically offers extremely high returns in order to attract new investors. Ponzi schemes require a constant flow of money from investors to keep the operation going. Sooner or later, all Ponzi schemes are destined to fail because it cannot attract enough investors to keep the scheme going and the investors lose the money they invested in the scheme.

So, is there any recourse for the investors who were victimized by Madoff? Sadly, they probably cannot recover the funds they invested the scheme. However, the investors may be able to claim a tax deduction for a portion of the money they lost in the Ponzi scheme. The Internal Revenue Code allows a deduction for a loss arising out of a theft.

In order to claim a theft loss for tax purposes, a victim of the Madoff Ponzi scheme must demonstrate that Bernard Madoff actions were a violation of federal or state law. The victims obviously made advances to Madoff on the strength of his assurances that they would receive generous returns on their investments. Clearly, the victims relied upon the misrepresentations of Madoff and they would not have invested in the scheme otherwise. As such, madoff’s fraud in obtaining the victims money brings this case within applicable state criminal statutes in respect to obtaining money by ‘false representation or pretense’ and potentially under provisions of the United States Code which make it a federal crime to use mails to defraud.

The next question is when the victims of the Madoff scheme can deduct their losses. The Internal Revenue Code provides that a theft loss deduction shall be permitted in the year of discovery. However, the loss deduction is deferred if a taxpayer has a reasonable prospect of recovering the loss. Judging by the media reports, the victims of Modoff’s scheme discovered their loss in 2008. As such, it appears the victims of the Madoff scheme could claim a deduction on this year’s tax return for their losses. Unfortunately for the victims of Madoff, a theft loss deduction may have to be deferred for sometime in the future. This is because investigators have yet to determine if Madoff transferred funds to offshore bank accounts or used funds to purchase other assets. Since these funds could be used to repay Madoff’s victims, it may be some time before the Madoff’s victims can claim the theft loss deduction.

It should be noted that there may be limitations to this loss deduction. First, the deduction will not cover the first $500 of the loss. Second, a theft loss is allowable only to the extent it exceeds 10 percent of each victim’s adjusted gross income.

For more information or if you have questions please use our contact form.