If you're unemployed, your life probably has enough complications without the extra burden of taxes. But while those out of work face a few additional aggravations as April 15 draws near, they can also take advantage of several welcome tax benefits.
The outstretched hand
First, the bad news: Those much-needed unemployment benefits you've been collecting are fully taxable. In 2009, your first $2,400 was not taxed, but in 2010, everything you got is fair game. If you haven't had taxes withheld from your payments, you may be dismayed by what you owe this year. You can fix this for future payments by filing Form W-4V: Voluntary Withholding Request. Meanwhile, a Form 1099-G will help you discover how much of this income you need to report.
Remember that each unemployed person's situation can be very different. For people on their own, getting by with just unemployment benefits and whatever odd jobs they can find, every dollar counts. Since they may end up owing little to Uncle Sam, these folks may not need to withhold taxes. People married to a spouse with a solid income, on the other hand, will find withholding for taxes more worthwhile.
The tax issues surrounding unemployment give rise to many common misunderstandings. For one thing, severance payments can be taxable. For another, unemployed people can't automatically deduct health-care costs. And most importantly, just because you're unemployed doesn't mean you can skip or delay filing your return.
Take credit
Take heart -- the tax news for the unemployed isn't all bad. If your income during 2010 was sufficiently low, you may qualify for the Earned Income Tax Credit (EITC). The maximum threshold is $13,460 for single, childless filers, rising to $48,362 for couples filing jointly with three or more qualifying children, with the maximum credit ranging from $457 to $5,666. The rules for the EITC are complicated, but it's worth looking into if you think you may qualify.
Looking for a new job costs money, but many of your expenses might be deductible. Typically, if you're seeking work in a new field or are a first-time job-hunter such as a new college grad, deductions are not permitted. But if you're looking within your industry for the same kind of work, you may be able to deduct the cost of traveling for interviews, phone calls, postage, resume printing, and even job placement services fees. You only benefit from the deductions if you itemize, though, and you can only deduct whatever expenses exceed 2% of your adjusted gross income.
A little time spent wading through credit card receipts can yield additional tax savings. And if you don't do so already, start keeping track of all your qualifying job-search expenses. Note that qualifying expenses count even if you don't get the jobs in question.
Once you land a new job, if it's in the same field and requires you to relocate at least 50 miles away, you may be able to deduct moving expenses. That's only if your new employer doesn't reimburse you, of course -- no double-dipping allowed. Note also that you need to stay in that new job for at least 39 weeks in the year to take the deduction.
If you're updating or strengthening the skills you needed in your most recent field, the costs of your education may qualify you for tax credits. The Lifetime Learning credit offers as much as $2,000. Educational endeavors might also qualify for the American Opportunity Credit, which offers as much as $2,500 for the first four years of college.
Last considerations
Finally, be careful when figuring out how to support yourself in these tough times. If at all possible, try to avoid withdrawing money from your 401(k), lest you seriously dent your nest egg and trigger potential tax penalties in the process. If you absolutely can't avoid tapping your retirement account, see whether you can take a penalty-free hardship withdrawal, or consult a financial or tax advisor to help you optimize the process.
Being unemployed unquestionably stinks -- but being smart about your taxes could help reduce your pain. Consult the following sites for more tax-savvy tips:
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool is Fools writing for Fools.
