The IRS lays down some rough rules on deductions for job-search expenses.
The key stipulation: They are deductible only if you incur them to find a new job in the same line of work. Note that you do not disqualify yourself for the deduction just because you fail to find another position or decide not to leave your present one.
But the IRS is unyielding in its refusal to allow any deduction for search expenses when you look for new employment in a different line of work. It makes no difference if you succeed in your quest.
Example: A computer programmer for a Detroit department store interviews for an identical position with a bank in Orlando. The IRS concedes a job-hunt deduction, whether or not the programmer actually switches jobs. Suppose, instead, that this Detroiter wants to change careers and is able to find work selling real estate in St. Louis. The feds disallow any deduction for the search expenses, even though the job hunt is successful.
Special rules apply if you are unemployed when looking for work. Among other things, your occupation is what you did for your last employer. Also, to satisfy the same-occupation requirement, there must not be a “substantial break” between your previous job and your present hunt for work. The IRS, however, provides no specific guidelines on how much time must elapse before a spell of unemployment becomes sufficiently lengthy to justify disallowance of a job-search deduction. The current IRS position is that the deduction is unavailable when there is a substantial break between your last job and your present search or when you enter the job market for the first time because, for example, you are just out of college.
Tip: Suppose, though, that a jobless person previously worked at different jobs. Presumably, that person can cite any one of those previous positions, provided it is recent, to establish that he or she seeks a new job in the same line of work.
Caution: But tax relief is unavailable when, say, a teacher switches to a sales position for a few years and now wants to resume teaching, or a person leaves work to raise a family and resumes a career after several jobless years. Under the IRS guidelines, both fail the same-line-of-work test.
The IRS balks at a break for someone who is an employee and wants to become self-employed. Someone who switches from employee to self-employed goes into a different business, says the IRS; the Tax Court, however, thinks that the tax collector wants to “draw his line too fine.”
The court sided with Howard Cornut, a certified public accountant who explored the possibility of quitting his position as an employee with the Portland, Ore., office of a national accounting firm to become his own boss. To test the waters, Cornut huddled with clients of his employer to see how many of them would shift their business from the firm to him. The response was encouraging enough to convince the CPA to leave his employer and set up shop with another ex-employee of the firm.
When Cornut filled out his Form 1040, he took a write-off for the trips to his former employer’s clients. No deduction, argued the IRS, as the disputed outlays were incurred to establish a business that was new, rather than continuing. But the Tax Court ruled in favor of the CPA, as he was simply seeking “to improve his employment opportunities in his profession.”
