Of course, numbers just tell half of the story. The folks who are without jobs know the real story. And it’s a tough one. There’s a lot to consider including how to pay the bills, getting a new job and figuring out your unemployment benefits.
The last thing that you’d need to worry about is taxes. Here are ten tax-related tips to help you sort it out:
- For federal income tax purposes, unemployment compensation is taxable. Also taxable? Any separation package or other payments or benefits (including accumulated vacation or sick time) that you might collect when you leave your job.
- Be sure and check any withholding reflected on your final check. If you’ve opted out of federal income tax withholding from your benefits during the year, you may have to pay more at tax time. If you think that might apply to you, consider making estimated payments during the year to avoid a potential penalty.
- Generally, withdrawals from your pension or retirement plan are taxable unless they are transferred to a qualified plan like an IRA. The treatment of retirement income or accrued benefits can be tricky so check with a tax professional, your financial advisor and/or your benefits administrator to find out the details ahead of time. Some actions – like not rolling a plan over to an IRA within 60 days – are irreversible for federal income tax purposes and penalties may apply.
- If you made a contribution to your IRA during the year – but now you need the money back – you’re in luck. Contributions returned before the due date of your tax return can be withdrawn without penalty. You’ll need to take out the contribution as well as any interest or dividend earned. Of course, if you take it back, you can’t claim a deduction for the initial contribution on your return.
- Food stamps and other forms of public assistance which might be available to you are generally not taxable. Don’t be afraid or embarrassed to ask about benefits. Temporary programs like food stamps, WIC (Women, Infants and Children) and those offered through TANF (Temporary Assistance for Needy Families) can help put food on the table for your children while you continue to look for work.
- Don’t forget to take advantage of deductions which might be available to you, including a deduction for expenses incurred while looking for a new job. Those expenses would be reported on your Schedule A, assuming you itemize your deductions, as miscellaneous expenses that exceed 2% of your adjusted gross income (AGI). You may not deduct the cost of looking for your first job in a particular profession (sorry new grads) or the cost of looking for a job in a new profession. If you’ve decided to pursue your dream job as a chef, that’s terrific, but if you were formerly an attorney, you can’t deduct the cost trying to get Bobby Flay to pick you as the Next Food Network Star. You also can’t deduct job expenses if there has been a “substantial break” between leaving your last job and starting to look for new job. There isn’t a magic number of days that qualifies as a “substantial break” but you must be reasonable. Taking a few months off to travel and find yourself a la Julia Roberts in Eat, Pray, Love is likely considered a substantial break as would taking a few years off to have children, though clearly not as much fun as traveling around the world, it’s more work, more expensive and it feels longer.
- If you move for work-related reasons, you may be able to deduct your moving expenses on your federal income tax return – and you don’t have to itemize to do it. Under the rules, you can deduct reasonable moving expenses so long as the move is “closely related” to the start of a new job for your trade or business; your new main job location is at least 50 miles farther from your former home than your old main job location was from your former home; and you work full time for at least 39 weeks during the first 12 months after you arrive at your new job location (the rules for the self-employed are a bit more complicated). The IRS doesn’t consider going to school a job – even if it feels like it sometimes – so moving for your education won’t qualify; similarly, you may not claim a moving expense for a move for an unpaid internship.
- If you’re responsible for paying your own health care insurance now, you may be able to deduct the cost of those premiums as medical expenses. You would include the costs of those premiums along with your other eligible medical expenses on Schedule A if you itemize. Keep in mind that those expenses are only deductible to the extent that they exceed 7.5% of your adjusted gross income. Here’s a quick example: Your medical expenses total $4,000 and your AGI is $20,000. You can deduct $2,500 of medical expenses: $4,000 (total expenses) less $1,500 (7.5% of $20,000).
- Don’t overlook available credits that you didn’t qualify for when you were working. Even though your income may have exceeded the threshold for the Earned Income Tax Credit (EITC or EIC) in prior years, you may be eligible for the credit this year. For 2011, your earned income and AGI must each be less than: $43,998 ($49,078 married filing jointly) with three or more qualifying children;$40,964 ($46,044 married filing jointly) with two qualifying children; $36,052 ($41,132 married filing jointly) with one qualifying child; and $13,660 ($18,740 married filing jointly) with no qualifying children. Additionally, your investment income must be $3,150 or less for the year. Assuming you meet those income restrictions and other criteria, you may qualify for the credit. Bonus: it’s refundable.
- If you’re relying on the kindness of strangers – or friends and family – to get through this tough time, those gifts probably aren’t taxable to you. As a rule, the person making the gift – not the recipient – is responsible for any applicable federal gift taxes. With respect to federal income taxes, the mere receipt of the gift is not a taxable event. Just keep in mind that the underlying gift keeps its taxable character, so if it’s throwing off interest, for example, that interest would be taxable to you.