Being unemployed is no fun. However, it does have one bright side: You'll save on taxes. Here are four tax tips for the unemployed:
1. Be Sure to File Your Tax Return
Be absolutely sure to file a tax return. If you're single under 65, you must file a return if your income exceeds $9,750. If you're married, filing jointly, and you are under 65, you must file if your income is over $19,500. Even if you earned less than this, you should file a return if you qualify for one or more of the tax credits discussed below. If you had income tax withheld during the year, you may be due a refund of all or part of it.
2. Report All Your Income
You need to report all your taxable income to the IRS when you file your return. This includes all unemployment compensation you received for the year. You should receive an IRS Form 1099-G, Certain Government Payments showing the amount you were paid and the amount of any federal income taxes withheld from your payments. You must also include any severance payments you received, including payments for unused vacation and sick days. If you earned any other income during the year, such as income from a business you began, you must include it as well. You need not include in your taxable income the value of government assistance you received, if any, such as food stamps or state public assistance.
3. Determine If You Qualify for IRS Credits
There are several IRS credits designed to help low and moderate income taxpayers that you may qualify for. Some of these are refundable, meaning you are paid the full amount of the credit even if it exceeds the amount of your tax liability for the year or you owe no taxes at all. These include:
- Earned Income Tax Credit: This is a refundable credit paid to low-income wage earners. The amount of the credit depends on your income and the number of children you support.
- Child Tax Credit: This is a credit of up to $1,000 for each child you support under the age of 17. See the Nolo article "Child Tax Credits."
- Child and Dependent Care Credit: This is a tax credit of up to $3,000 for one child and $6,000 for two or more children that may be claimed by low and moderate income taxpayers who pay for child care. See the Nolo article "Child Tax Credits."
- Savers Credit: This is a credit of up to $1,000 ($2,000 for couples) for retirement plan contributions by taxpayers with modest incomes. See the Nolo article "The Saver's Tax Credit--Save on Taxes By Saving for Your Retirement."
4. Deduct Job Hunting Expenses
Most of the expenses you incur in looking for a job are deductible as a miscellaneous itemized personal deduction. This includes the cost of preparing and mailing resumes, creating and maintaining websites, business cards, travel expenses, and other expenses.
To be deductible, the amount that you spend for job search expenses, combined with your other miscellaneous expenses, must exceed 2% of your adjusted gross income. Only the amount over the 2% threshold is deductible. Of course, if you have little or no income because you're unemployed, the 2% threshold will be quite small. See the Nolo article "Tips for Deducting Job Search Expenses."