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You Can't Duck the IRS Just Because You Lost Your Job
Get Help With Your Taxes
The Tax Implications of Being Unemployed
If you’re out of work – and about about 10 percent of Americans were at any given time in 2010, taxes are probably the last thing on your mind. But the fact is, unemployment doesn’t include a holiday from the Internal Revenue Service. Being jobless actually has broad tax implications. This hub explains the bad – unemployment benefits are taxable, natch. It also identifies situations where job seekers can use the tax laws to their advantage.
“You can’t assume that because you aren’t earning income from work, that you don’t have tax obligations,” explains Mark Luscombe, a tax lawyer at CCH, a Chicago-based publisher of tax information. “However, while you may have some taxes to report, you may also have deductions that can help reduce or eliminate your taxes.”
First things, first: If you collected unemployment checks in 2010, you may owe tax on them, especially if you didn’t elect to have taxes withheld from them by the state that issued you the check. A special law in 2009 that exempted the first $2,400 of jobless benefits from income tax expired. The good news is that if your income was low enough overall, you may not have earned enough to pay taxes. And, many of the expenses associated with caring for your family during destitute times and looking for work may offset any liability.
Take These Deductions
Take health care benefits, for example. If you paid to keep coverage under your former employer under COBRA, those premiums become deductible once they exceed 7.5 percent of your adjusted gross income if you itemize. Other medical expenses also become deductible once you clear that threshold. (On a separate note, Congress authorized a 65 percent subsidy for COBRA payments for half of 2010. That benefit expired May 31.)
Many costs associated with job-hunting also are deductible. These include printing, postage, long-distance telephone calls, and travel expenses for out-of-town interviews that aren’t reimbursed by prospective employers. A big caveat: These expenses are only deductible if you’re looking for work in the same field. Say you were successful and found a job, but it was in another state. Your moving expenses may also be deductible, provided iyour new workplace is at least 50 miles farther from your old house.
Avoid These Mistakes
Workers who lose their jobs also make huge tax mistakes, often without realizing it. The biggest ones usually involve workplace-sponsored retirement accounts such as 401(k) plans. Cashing out a retirement plan or failing to roll it over properly into an Individual Retirement Account could cost you a bundle in unexpected penalties and tax. While you may be tempted to tap the cash in your accounts, doing so will cost you an extra 10 percent above your tax bracket (you can avoid this penalty if you’re 59 ½ or older, were laid off after turning 55, or set up a system of regular withdrawals after losing your job.) The smartest strategy is either to leave your 401(k) with your old employer (although you won’t be able to continue making contributions) or roll it over directly into an IRA.
People who turn to freelance work to make ends meet also wade into a tax minefield and must be conscious of following a new set of rules about which they may not have known when collecting a steady paycheck. Even if you’re taking contract work on a temporary basis, the IRS considers you to be self-employed. That means you’ll be responsible for paying the entire 15.3 percent FICA payroll tax for Social Security and Medicare (when you’re employed, your boss pays half). On the flip side, you can write-off work-related expenses such as a home office, dues for unions and professional associations, even postage stamps. You can also depreciate office equipment such as a new computer and may be eligible for some tax credits targeted to small businesses. Just be sure to keep good records, as the IRS has higher rates of audits for small businesses.