March 23rd, 2011Important Tax Considerations When You’re Unemployed
When you’ve been unemployed, you need any financial relief you can get. Fortunately, some of that relief may come from Uncle Sam in the form of income taxes saved. Here’s how:
When you earn less, you pay less in taxes. When you’re working, you have withholding taken out of your pay as if you will earn at the same rate all year. However, if you are off work for any significant length of time, it can drastically change how much you owe. That’s because the last dollars you earn are taxed at the highest rates. If you had too much withheld, the IRS may owe you money.
What to do When You Lose Your Job
If you are the sole support of your household, you’ll have to wait until you file your tax return to get any overpaid tax back, but if you are married and one of you becomes unemployed, the other spouse should adjust his or her withholding amount immediately to account for your new tax situation and free up more money for the monthly budget.
Important Deductions for the Unemployed
While you look for work, track all your job-hunting expenses. Include transportation to interviews (don’t forget parking and tolls), subscriptions to online job search services, admission to job fairs, and resume consultations. You can even deduct trips to look for work in other locations. See IRS Publication 529, Miscellaneous Deductions.
If you take that computer course or other class to update your skills, you may qualify for a tuition deduction or a credit (IRS Publication 970, Tax Benefits for Higher Education).
If you have to move to a new job, you can deduct the cost of moving yourself, your dependents and everything you own. IRS Publication 521 has the details.
Generally, if you take money out of a retirement account, even if you are unemployed, you still pay penalty and income tax on the amount you withdraw. However, any contributions you just made can still be taken out, as long as you do it before the due date of your return. In addition, you may qualify for exceptions to early withdrawal penalties if you are unemployed and the money is used to pay medical expenses in excess of 7.5 percent of your income. See IRS Publication 575 for more information.
Now for the bad news. There was a day when unemployment benefits were not taxable. Alas, they are now included in your income, along with severance pay, vacation pay, and sick pay. You can choose to have income tax withheld from your unemployment benefits if necessary. Run the numbers yourself or talk to your accountant to see if that’s necessary.
Losing a job can be devastating to your financial situation, but if you’re educated about the tax advantages available and prepare your return with these in mind, you may be able to recoup some of your losses and get back on your feet sooner.