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Tax Issues for the Unemployed

If you are unemployed, you likely spend more time looking for work than worrying about tax planning. However, there are a number of tax issues for the unemployed that you should consider to assure that you pay the proper amount of taxes and avoid possible tax penalties. In addition to avoiding penalties, there are also some tax deductions and credits that you may be eligible for to reduce your tax obligation.

  1. Unemployment Benefit Taxes

    • You have to pay taxes on your unemployment compensation. If you are in a low-income household, you will likely owe very little in income taxes. However, if you are in a household with a working spouse, you may owe much more. You can choose to have taxes taken from your unemployment benefits; contact your local unemployment office to determine how to set up this withholding.

    Other Taxes

    • When you left your last employer, any severance pay or unused vacation or other leave that you received as pay will also count as taxable income. If you must withdraw money from a 401(k) or other retirement fund, there will be tax consequences even if you are unemployed. Withdrawals from most retirement accounts will be subject to income taxes and a 10 percent penalty. One exception is money taken from a Roth IRA, which is tax-free as long as you withdraw less than the amount you contributed and do not draw from the investment earnings.

    Job Search Deductions

    • If you spent money looking for work in the field in which you last worked, you may be able to deduct some of the costs of the job search. Deductible expenses include travel expenses, postage costs, and fees for job placement services. However, you must itemize your deductions in order to claim these expenses. In addition to itemizing your deductions, you can only deduct your qualified expenses that exceed 2% of your adjusted gross income. If you land a job in your old field and you must relocate more than 50 miles away from your old home, you can deduct the costs of moving.

    Possible Deductions and Credits

    • If you start a business, work on a contract basis or perform other self-employed work, you will be eligible for a number of tax deductions not available to employees. Some examples include travel expenses to job locations, home office expenses, advertising costs and the fees paid to professionals such as an accountant or attorney. If you go back to school, you may be eligible for education-related tax credits or deductions. If your income qualifies, you may also be eligible for the Earned Income Credit and the child tax credit, which will reduce your tax obligation and possibly increase the amount of your tax refund.

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