Tax breaks for the unemployed

CNNMoney.com By Blake Ellis | CNNMoney.com

For unemployed Americans who have watched their savings diminish as they look for work, tax season may finally bring some relief.

Out of work job seekers can deduct all sorts of expenses, including the cost of printing and sending hundreds of resumes, hiring headhunters, even what they spend on travel to interviews. There are also tax perks they can qualify for if they decide to throw in the towel on the job search and become self-employed or freelance.

And for those who can't come up with the money to pay their taxes right away, the IRS is offering the unemployed additional help this year -- a "grace period" that will give them extra time to pay their tax bill without incurring penalties.

"There's no question, most people would rather have a job than have to look for tax breaks for being unemployed," said Mark Luscombe, principal federal tax analyst at accounting firm CCH. "But for those facing an extended period of unemployment, they can benefit from knowing the steps to take to lower their tax bill."

Seeking employment: Job seekers can deduct search-related expenses, including employment and outplacement agency fees, job search site memberships, as well as resume printing and mailing costs.

Travel costs are also fair game. Say you have an interview in Washington, D.C., but live in Ohio. You can write off the airfare or the cost of gas if you drive there. You can even claim these costs if you head to D.C. without an interview lined up, as long as you're actively looking for work while you're there.

Be careful not to push it too far when claiming these expenses. Manicures, clothes and makeup are some of the deductions the IRS views as red flags.

One general rule of thumb to follow is that anything that can be used for purposes other than your job hunt can't be deducted, said Gordon Ulen, a Danvers, Mass.-based CPA. But because it can be hard to know which expenses qualify, and you need to itemize in order to claim the deductions, it's smart to use a tax preparer. And it's extremely important to document all of your expenses in case you do end up being audited.

Another important thing to remember is that to qualify for job search deductions, you must be looking for a job in your present field of work. You can't be looking to switch careers.

Craziest tax deductions

First-time job seekers, like college graduates, don't qualify for job search deductions, and neither do taxpayers re-entering the workforce after a substantial period of unemployment, like stay-at-home parents who decide to go back to work.

Job search costs must also exceed 2% of your adjusted gross income to qualify as deductible expenses, which shouldn't be a problem for most out-of-work job seekers but could prevent some freelancers or self-employed taxpayers from being able to claim them.

And don't worry: You can still deduct the costs of a job search even if you weren't hired.

You're hired!: If you end up landing a job that requires you to relocate, you can often deduct moving costs -- including lodging, packing, transportation, tolls and parking.

Typically, you can deduct these costs if the new job is at least 50 miles farther from your previous home than your former workplace was, you moved within a year of taking the new job and you were employed full time for 39 weeks during the first 12 months following the move, said Luscombe.

If you haven't been at the new job 39 weeks yet, you can claim the expense but you have to file an amended return or include the deducted expense as part of your gross income on your return.

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Just remember: You can't claim any costs that your new employer is already reimbursing.

Going it alone: If you gave up on the job hunt and started freelancing or working for yourself, you can deduct self-employment expenses like a home office and certain meal and entertainment costs.

Home office deductions are big audit red flags for the IRS, however. So make sure you document all of your expenses -- down to the utilities you use, alarm systems, even housekeeping. To qualify for a home office deduction, you must use the office exclusively for work and it must be your primary place of business -- not one of several offices.

And don't get carried away with the office-related expenses you claim. For example, Luscombe said some taxpayers claim the main household phone line as an office expense, when they would need to have a second office line that they use exclusively for business to qualify as a legitimate expense.

Along with home office expenses, work-related travel costs, health insurance premiums and professional association fees are also acceptable deductions when you're self-employed.

Health care costs are deductible too, if they exceed 7.5% of your adjusted gross income. If this is the case, deductible medical expenses include doctor visits, treatments, prescriptions and dental costs, said Luscombe.

Watch out!: Aside from being careful about what you deduct, remember to pay taxes on any wages you earned during the year before losing your job. If you were laid off and you received a severance package from your employer, that pay is also considered taxable income. And don't forget that you'll be taxed on any unemployment benefits you received during the year.

Can't pay your taxes?: If you were, or will be, out of work for at least 30 consecutive days during 2011 or 2012 -- up to April 17 this year -- or you're self-employed and your business income has dropped by 25% or more due to the economy, the IRS is giving you some extra time to pay your taxes without charging late penalties.

The agency announced this month that it will give qualifying taxpayers a six-month grace period on "failure-to-pay" penalties, which are typically assessed each month a taxpayer is late paying their taxes.

In addition to the penalty relief, the IRS is also allowing more taxpayers to spread out payments on their tax bills. Taxpayers with bills as high as $50,000 are now eligible for installment payments -- up from a previous cap of $25,000. And these taxpayers aren't required to file a financial statement to do so. The maximum installment term was also boosted to 72 months, up from 60 months.

IRS offers relief to unemployed taxpayers

"If you can't pay your taxes, file anyway, and just work with the IRS to create a payment plan," said Ulen. "As long as you keep up with the plan, they won't bother you -- but if you ignore them, they can be nasty."

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