CHICAGO – January 2016 - When you’re unemployed taxes may be the last thing on your mind, but it’s imperative that you continue tax and other financial planning. As a newly unemployed individual, you may qualify for deductions and credits or be responsible for taxable income you aren’t aware of. Below is a list of tax tips to help the newly unemployed navigate tax season.
Your Unemployment Income Is Taxable
Did you know that unemployment benefits are subject to both federal and, depending on where you live, state taxes? You must report and pay taxes on any kind of unemployment income, including both state and federally funded benefits. You can have federal and state income taxes withheld from your unemployment check. This is worth considering, since it will help prevent you from spending money that should be set aside for taxes. Otherwise, you will need to pay quarterly estimated taxes on your unemployment income to avoid underpayment penalties.
Don’t Forget to File a Tax Return
Filing your tax return may seem unnecessary if you aren’t earning income, but it’s still likely required. Keep in mind that any severance benefit or vacation or sick pay you received when you were laid off may be included in your taxable income. On the upside, if you worked for part of the year and had taxes withheld or paid estimated taxes while employed, you may get a refund due to your subsequent drop in income.
You May Be Eligible for Tax Benefits and Credits
A lower income may help you qualify for a variety of programs, including the federal Earned Income Tax Credit (and similar state and local credits), that can lower your taxes or even provide a refund. Other credits that may reduce your federal tax outlay include the Child Tax Credit and the Child and Dependent Care Credit. Check to see if you qualify.
Keep Receipts for Costs Related to Your Job Search
Travel expenses for a job interview, the costs of résumé preparation and mailing and outplacement agency fees are just some of the expenses you may be able to deduct if you itemize your deductions. Moving expenses may also qualify if your move is related to the start of your new job and you meet the distance and time requirements. Moving expenses can be deducted even though you don’t itemize your deductions.
Are You Going Back to School
If you are going back to school to upgrade your qualifications or start a new career path, you may qualify for educational credits – some of these credits are “refundable” – meaning that you may get additional money back on your return.
Be Careful when Dipping into Retirement Plans
It is understandable that a taxpayer that is out of work will see the balance in their retirement plan as an easy source of cash. There are two ways to withdraw money, and both should be approached with caution. The first is a distribution. A distribution doesn’t need to be repaid but is taxable, and if the taxpayer is under 59 ½ years old the person is subject to a 10% withdrawal penalty from a traditional IRA (or under 55 years old from a qualified retirement plan), unless they meet an exception.
The second way to take money from your account is a loan. Taking a loan is different from a distribution for tax purposes as it is not immediately taxable income and must be repaid to the account with interest. If the loan is not repaid, it will be deemed a taxable transaction. However, if you are no longer employed with the employer that administers your retirement plan, this option probably won’t be available. If you are married and your spouse has a retirement plan account balance through their employer, you could consider borrowing against your spouse’s retirement plan.
About the Illinois CPA Society
The Illinois CPA Society, founded in 1903, is one of the largest state CPA Society in the nation, with more than 23,000 members. It is the premier professional organization that represents CPAs in Illinois. For more than a century the Society has advanced the highest ethical and financial standards of the profession, and remains a leader in educating the public on financial issues. The Money Management columns are a joint effort of the AICPA and the Illinois CPA Society, as part of the profession’s nationwide 360 Degrees of Financial Literacy program. To find a CPA in Illinois with the unique qualifications and expertise to guide you through tax season visit the Illinois CPA Society’s free “Find a CPA”