Tax Breaks for Job Hunters

You can exclude $2,400 of unemployed benefits from taxes — but it isn’t automatic.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

March 7, 2010

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Last year was difficult for millions of Americans who lost their jobs. But tax time could bring some relief, with new breaks for unemployment benefits and employer-subsidized health-care benefits for terminated workers. And lower income in 2009 may make it easier for you to qualify for a number of other tax deductions and credits.

With the highest jobless rate in decades, many Americans are receiving unemployment benefits for the first time, and some may not realize that all of those benefits are usually taxed. But job hunters catch a small break when they file their 2009 tax return: The first $2,400 of unemployment benefits received in 2009 is exempt from federal income taxes.

The exclusion isn’t automatic, however. You must subtract $2,400 from the amount of total unemployment compensation shown on Form 1099-G, which you received from your state unemployment agency, to determine the taxable amount to report on your Form 1040 (or 1040A or 1040 EZ). If both spouses received unemployment benefits last year, each can exclude $2,400 from taxable income.

Tax-preparation software makes it easier to spot this and other new tax breaks. And if your 2009 income was $57,000 or less, you qualify for free tax preparation and e-filing at www.irs.gov/freefile.

Other tax breaks

A lower income in 2009 may make it easier to deduct job-hunting expenses, such as résumé printing and postage, career-counseling fees, and local and out-of-town travel expenses for job interviews. As long as you itemize, you can deduct those costs along with other miscellaneous expenses, such as tax-preparation fees or union or professional association dues, but only to the extent that the total expenses exceed 2% of your adjusted gross income. The lower your income, the more expenses you can write off. (Of course, it only makes sense to itemize your deductions if it would give you a bigger tax break than the standard deduction for you filing status).

You can claim a deduction for the cost of a job search in your same line of work (subject to the 2% of AGI floor) whether or not you find a job. But you can’t deduct job-hunting costs if you are seeking work in a new field or you are a new college grad looking for your first full time job.

Lower income for 2009 may also help you deduct medical expenses. You can deduct out-of-pocket health-care costs that exceed 7.5% of your AGI -- normally a very high hurdle to overcome -- on Form 1040 Schedule A. Some laid-off workers qualify for employer-paid subsidies of up to 65% of the cost of their continued medical benefits. Those COBRA subsidies are tax-free as long as your AGI for 2009 didn’t exceed $125,000 if you are single or $250,000 if you are married filing jointly.

Qualify for tax credits

Lower income may also qualify you for valuable tax credits that reduce your tax bill dollar for dollar. For example, if you incurred child-care expenses while you worked or looked for work, you may qualify for a credit of up to $2,100, depending on your income. Use Form 2441 to claim the Child and Dependent Care credit. Or you may be able to claim a Lifetime Learning credit of up to $2,000 on Form 8863 if you took classes in 2009 to prepare for a new career.

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Reader Comments (1)

Posted by: Gay Waldman at 03/08/2010 06:13:12 PM

I enjoyed your article March 7th in the Washington Post about Roth conversions. I am confused by the sentence "The five year rule does not apply to taxpayers older then 59 1/2". Everything I have read seems to dispute that fact and I would appreciate it if you would clarify it for me.