Unemployment brings a variety of tax deductions

Sylvia Porter

February 04, 1991|By Sylvia Porter | Sylvia Porter,1990 Los Angeles Times Syndicate Times Mirror Square Los Angeles, Calif. 90053

Millions of Americans have been laid off or fired as organizations "down-size" to cope with recession. There's more down-sizing to come. Does the crisis of being unemployed have a silver lining? Yes, it reduces your taxes. You don't pay income taxes on income you don't earn.

Whether you can take solace from this is questionable. Yet, it's useful to know that the current tax laws allow a variety of deductions for which you now are eligible. If you are looking for a new job, your resumes, long-distance telephone calls, employment agency fees, travel and advertising costs can be listed as itemized deductions. If you relocate, you can deduct moving expenses.

But note that "miscellaneous itemized deductions" are disallowed up to 2 percent of adjusted gross income. That means if your adjusted gross income is $10,000, your "employee" business expenses are deductible only to the degree that they exceed $200, David M. Hudson points out. Hudson is professor of law at the University of Florida College of Law and a contributing editor of Bender's Federal Tax Service.

If you do not find a job by year end, the deductions may not help you, Hudson observes. But if you lose your job and find another, you can deduct your losses incurred early in the year from the income you generate later in the year.

L Rules you should know if you are unemployed, or about to be:

* Unemployment benefits. These count as gross income. They can serve as income against which you can deduct your job-hunting expenses. Keep a record of everything, including calendar notations and itemized receipts.

* Moving expenses. You are entitled to moving expenses whether you lose your job or not. The requirement is that you must be employed in the new location for a certain period of time. If you move to a new place without a job, you have one-quarter of a year to qualify. During the 12-month period after you arrive, you must be a full-time employee for at least 39 weeks.

Deductible expenses include transportation to your new home ZTC for you and your family, transfer of your possessions and temporary living expenses.

* Pension plans. If you take an early distribution from your plan because you need money, you will pay penalty taxes. There are a few exceptions, but none of them relates to the issue of losing your job.

Examine your plan carefully for its particular benefits. Some plans allow you to borrow money, and you may have five years to pay back the loan without being subject to taxes. Of course if you don't make that payment, you will owe penalties.

* Health insurance. If you are laid off and your employer continues paying your premiums for medical insurance, that amount is not included as income. The same rule goes for military reservists called up for active duty and whose employer continues benefits.

* Selling your house. If you sell your house at a loss -- let's say you bought it for $100,000 and sell it for $80,000 -- you generally are not entitled to a deduction of $20,000 loss because it still was for your personal use when it was sold.

However, if you turn that house into a rental property before you sell, you can take deductions, including depreciation and the cost of repairs. When you convert your house to a rental property, you do not have to have a tenant. However, you must move out and advertise the property for rental or sale.

If you incur a loss, the amount which may be deducted in the year of the sale may be limited. The general rule is that capital losses in a given year may be deducted only up to the amount of capital gains for that year, plus $3,000. If you had no capital gains in the year in which this loss of $20,000 occurs, you could deduct $3,000 (offsetting salary and other income). Then, the remaining $17,000 of the loss is carried over to the next year, and may be deducted in an amount equal to capital gains in that year, plus $3,000. You can continue deducting up to $3,000 per year until the amount of the loss is fully deducted.

Some people call this the "better than nothing" scenario because the deductions eventually offset your losses, says Hudson.

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