Helpful Hints for the Unemployed Taxpayer

If you were among the millions of Americans who lost a job during 1991, you’re likely to be hit with a few nasty surprises when you file your federal income tax return.

Contrary to popular thought, unemployment benefits are taxable. But the taxes are generally not withheld from unemployment checks. Those who received unemployment insurance payments for part of the year are likely to owe the federal government money.

Those who took odd jobs to make ends meet must also pay tax on that amount. And, again, it is likely that these taxes were not deducted from their paychecks. Worse still, if they were termed “independent contractors,” they may also be liable for self-employment tax.

As if that wasn’t enough, there’s one more potential problem: Those who paid in too little during the year could be hit with underpayment penalties.

However, these individuals may be able to reduce their total federal tax bills and, possibly, avoid any underpayment penalties by carefully filling out tax returns with an eye to special deductions available to job seekers and independent contractors.

People in this position must be particularly careful though. The deductions available to them are often disputed by the Internal Revenue Service. Those who keep detailed records and follow the letter of the law will be able to keep their deductions. Those who fail to properly substantiate their claims could lose them.

Here’s a summary of some of the deductions job seekers can claim and the restrictions on claiming them:

* If you were actively searching for work during the year, the cost of printing resumes, making phone calls and travel and mileage expenses related to your job search are all deductible as miscellaneous expenses.

That means that any amount that exceeds 2% of your adjusted gross income is deductible. Some business publications that would help in the search also fall into this category. If you subscribe to a newspaper solely to get access to the help wanted advertisements, you may even be able to deduct the cost of the newspaper subscription, according to Gregg Ritchie, partner at the accounting firm of KPMG Peat Marwick.

But beware: Job search expenses are only deductible if you are seeking work in your same field. An accountant who tries to get a job as a truck driver can’t deduct job search expenses. But it is the search, not the result, that’s important, Ritchie said.

If this accountant were seeking a job in his own field, but happened to land a job in an unrelated industry, the expenses would still be deductible. But he may need to document where resumes were sent, who was called and other details of the search that prove he was looking for accounting work. That documentation should be saved for at least four years in case of an IRS audit.

* If you were forced to relocate to get or keep a job, the unreimbursed cost of the move is also deductible.

* Those who became independent contractors by virtue of free-lance work during a layoff may also be able to deduct a wide array of business expenses. If our out-of-work accountant did tax returns from home, for example, he would be able to deduct the cost of office furniture, calculators, fax machines and other business supplies that were necessary to do the job. If he met clients in his home and used a home office as his principal place of business, he may even be able to write off a portion of the cost of his house.

Home office deductions are widely believed to be audit triggers, however. That means it’s likely that this individual’s deductions would be challenged by the IRS. He should keep records of who he met and when; how many hours he spent in the home office and be able to prove that the office was not used for any other purpose. If the office was also used as a family den, the home office deductions would be disallowed. However, he should be able to maintain deductions for the cost of his business equipment.

* If this individual paid self-employment taxes, half of that tax is deductible. (Of course, property taxes and state and local taxes are deductible as well.)

* Those with small children can often claim child care credits, which are available to two-income families who must hire a baby-sitter in order to work. Although both spouses must ordinarily be working to claim this credit, if one is actively seeking work, the credit can generally be claimed.

There are several exceptions, though. The credit can only be claimed to the extent that each parent earns income. So someone who is out of work all year cannot get the credit, unless he or she is a full-time student.

Additionally, the taxpayer must report the name, address and taxpayer identification number (or Social Security number) of the care provider, who cannot be another dependent.