If you are unemployed it means that you will have to pay special attention to your taxes. In some instances, federal tax laws could pose new expenses to jobless individuals, while in other circumstances it could ease the financial burden of unemployment.
Unemployment compensation that the jobless receive is in fact considered taxable income. If you receive unemployment benefits, you will get a Form 1099-G which will tell you how much unemployment you have to report on your yearly tax return. If you opted not to have taxes withheld from unemployment or did not make estimated tax payments, chances are you will owe the IRS the unpaid amount. However, if you are married and your spouse is employed, then they can cover your unemployment taxes on your behalf.
Workers with little income are eligible for a tax break called the earned income tax credit, or EITC. Even though unemployment benefits don’t count towards EITC, you may be able to calculate a possible credit claim if you have other sources of income. A good thing about this tax credit is that it is refundable, so if you don’t owe any taxes, you will be able to get a refund of the excess EITC amount.
If you have lost your job, you may be tempted to cash out a retirement plan to make ends meet. While you will likely have to pay a 10% early withdrawal penalty if you are not yet age 59.5 for a traditional IRA or younger than 55 for a 401(k), this fine may be waived under certain situations. For example, if you use your IRA money to pay for unreimbursed medical expenses that are more than 7.5% of your income, then you are relieved from paying the early distribution fee. However, you will still be obligated to pay taxes on the amounts withdrawn from the retirement account.
If you are looking for a job, make sure to hold on to your job search receipts. Expenses such as employment agency fees, job-hunting traveling costs and resume services charges can potentially be deductible from your taxes. However, keep in mind that these costs fall under miscellaneous deductions, which means job-hunting expenses along with other miscellaneous expenses must be more than 2% of your adjusted gross income before you can claim them.
Losing your job and being unemployed can be a heavy financial burden. That is why it is important to learn about what help is available out there for the jobless and how it could impact your taxes for the year.