Tax Tips for Those Collecting Unemployment
If you lose your job, your focus shifts to how you'll find another job and how you'll pay your bills while you look for work. Unemployment benefits help fill the gap, but they only replace part of your income. While you're juggling your finances to fit your new situation, you may not think about taxes, but you should. Even though you're not currently drawing a paycheck, you still owe taxes on your unemployment benefits, and you don't want to miss some tax deductions you could be taking while you search for a new job.
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Unemployment Benefits
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You'll owe income tax on your unemployment benefits. You can elect to make quarterly payments to the Internal Revenue Service, but a better option for most people is to ask your unemployment office to withhold taxes from your checks. This decreases the size of your check, but protects you from owing a large sum of money come tax time. Most departments will withhold about 10 percent of your check to cover taxes, but an unemployment benefits counselor will tell you the exact amount so you can budget for the money you'll receive.
Deductions
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You can deduct some of the costs associated with looking for a new job from your taxes if you itemize deductions. Keep track of the postage you spend to mail out your resume, printing costs, costs of attending job fairs or travel costs if you look for work in another town. Any fees you pay to job search firms are deductible, as well as job training courses. But you must be looking for work or brushing up on skills in your same job field in order to qualify for these deductions. If you end up relocating more than 50 miles away to take a new job, you can deduct all or part of your moving expenses.
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Tax Benefits
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Unemployment may put you in a lower income tax bracket where you may qualify for additional deductions and benefits, such as an Earned Income Tax Credit, a Child Tax Credit or a Saver's Credit for putting money aside for retirement. If you pay for daycare while you look for a job, you may qualify for a Child Care Tax Credit. Free or low-cost tax preparation software can steer you toward these and other deductions or credits that can help lower your tax burden.
Medical Insurance
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If you continue to pay for medical insurance through your former employer under the COBRA benefits plan, you can deduct the amount of your premiums that exceeds 7.5 percent of your adjusted gross income from your taxes. This deduction applies even if you qualify for other government credits that help reduce the cost of your COBRA coverage.
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