The unemployed have to pay full taxes on their unemployment benefits in 2010, unlike 2009 when the first $2,400 was tax-free.
Those individuals who did not withhold taxes on unemployment benefits are sometimes surprised with an extra $10,000 in income to report in April of the next year, said Annabelle Rodriguez, a tax advisor for H&R Block in Weston, Fla.
Unemployed taxpayers can elect to have 10 percent of their unemployment payment withheld from each check by filing Form W-4V: Voluntary Withholding Request. Unemployed workers who have been paid unemployment compensation in 2010 should receive Form 1099-G showing the amount.
Lynn Brewer, principal of the tax firm Friedman Cohen Taubman in Plantation, Fla., said individuals who receive unemployment benefits often have different types of income to report. They may have severance or unused vacation pay from their previous employers, unemployment benefits, and self-employment income for freelance or odd jobs during the year.
Tax is usually withheld before a company pays severance. But consider your spouse's income when deciding whether to withhold taxes from your unemployment payments. An unemployed individual who is married and filing income taxes jointly might be best to withhold taxes to avoid surprises, Brewer said. But for a single person only with unemployment benefits as income, any tax owed could get cancelled out in a lower tax bracket.
The Earned Income Tax Credit is another way for those who are unemployed to reduce their tax bill. To qualify, the taxpayer must have earned less than $13,460 as a single filer with no children. This caps at $48,362 in income for married couples filing jointly with three or more qualifying children, according to H&R Block.
One mistake unemployed individuals often make is cashing in part or all of their 401(k) retirement plans without consulting a tax advisor, Brewer said. If making a withdrawal before 59 1/2 years of age, individuals will be penalized. But they may be able to avoid penalties by taking a hardship withdrawal from their plan, or working with a tax advisor to take equal and periodic payments, she said.
Deductions from a job search are only available to those who are seeking a new job in their current occupation or industry. Individuals must itemize their deductions, which must be over 2 percent of their adjusted gross income, Rodriguez said.
But for those searching for a similar job or in the same industry, tax deductions can include long-distance phone calls, vehicle mileage for interviews, professional placement service fees, printing and mailing resumes, and unreimbursed travel for interviews.
So dig up your receipts and keep an electronic record of your job-search expenses, the tax advisors say.
Education and updating of skills also can be deductible if it relates to your former industry or trade, Brewer said. But any job seeker who returns to school may be eligible for the American Opportunity Credit, up to $2,500 for the first four years of a college education, Rodriguez said.
Once a job seeker finds a job, a deduction can be taken for any moving expenses if they were not covered by the new employer, if the job is in the same industry or trade, and if the individual has to move at least 50 miles. The taxpayer also has to be employed at the job in the new location for at least 39 weeks during the year before taking the deduction.
And many tax preparation companies offer free or special deals for the unemployed, so shop around.
Source: McClatchy-Tribune Information Services.