Losing your job is one of the most stressful things you can go through. However, it doesn’t give you an excuse to not pay your taxes or pay attention to tax deductions that you qualify for.
Unemployment checks are taxable
It is important to remember that unemployment compensation is taxable. Take it from me, you don’t want to miss this! We forgot to include unemployment compensation a few years ago. Then a year later, we were hit with a big tax bill along with interest. Yes, I’m human and I make mistakes!
At the beginning of the year, you should have received a 1099G form from your state’s Department of Labor and Employment office. It will show the total amount you received from unemployment for the previous year and any taxes you requested to be withheld. You can use this to do your taxes.
Job Search Tax Deductions
You may be eligible for the these deductions while searching for a job:
1. Employment agency. If in a later year your new employer repays your agency fees, you must include the amount in your income up to the amount of the deduction you claimed earlier. If your employer pays fees directly to the agency, you don’t have to include them in your income.
2. Resume preparation: typing and printing, postage, long-distance charges, advertising, and photographs required for your resume. This may be less relevant, since nowadays, more resumes are being sent online rather than through snail mail.
3. Travel: airfare, mileage (some automobile expenses have been approved), meals (based on either actual expenses or standard federal per diem rates) and lodging (actual expenses only). You can use this deduction when you have to travel some distance to attend an interview or perhaps, a job fair.
Qualifying for Job Search Tax Deductions
To qualify, your job search must be for a job in your current, or most recent, trade or business and should be at a similar level of responsibility with duties similar to those of your most recent job.
- If you haven’t held a job in that trade or business for an extended length of time, your job search will be considered for a new trade or business, and your deductions may not be allowed.
- If you held a college internship or valid job while in college and your search is for a job in the same trade or business, you will be able to deduct job search expenses.
- If you’re just out of school and had no paying jobs while in school that were related to your trade or business, your deductions won’t be allowed.
You cannot deduct these deductions if:
- You are looking for a job in a new/different profession.
- There was a substantial break between the end of your last job and your search for a new one.
- You are in the job market for the first time.
Earned Income Tax Credit
If you worked for any part of the tax year, even if you were unemployed at the end of the year, you may still be eligible for the Earned Income Tax Credit (EITC). This tax credit is for people who have worked in the tax year, and have earned a low to moderate income. By reducing the amount of taxes you owe, a tax credit means more money for you and possibly a refund.
Can I make a 401(k) withdrawal without penalties?
Tapping into your 401(k) plan should be a last resort after you have exhausted all other money sources. Being unemployed does not qualify you to withdraw money without penalties. The penalty for early withdrawal can be as much as 50% of the amount drawn when all penalties, federal and state taxes are combined (not all states have penalties). The 401(k) withdrawal is considered income and may move you to a higher your tax bracket, causing you to potentially lose other deductions or credits.
If you can prove financial hardship, you may be able to avoid penalties. If you are withdrawing money from your 401(k) for medical expenses, you no longer have to pay a penalty tax. And if you are above the age of 55, you can make withdrawals from your 401(k) for other purposes as well.
This tax information is courtesy of H&R Block.
Photo Credit: x_jamesmorris