Filing Taxes When You are Unemployed

by Guest Contributor · 3 comments

Unemployment is still close to double digits. Tax laws are governed by the state of the economy, and the government makes amendments from time to time mainly with a view to giving relief to tax payers.

If you have been unemployed for more than a year you still need to file a federal income tax return. It is important to remember that all unemployment compensation is taxable. In addition, because you may be in a lower income bracket, you may qualify for more deductions or different types of deductions than you have in the past. Also, keep in mind that certain job search expenses can be deductible for some taxpayers.

Are unemployment benefits taxable?

For 2010, all unemployment compensation is taxable. Unlike wages, no tax is withheld from unemployment unless you specifically request it by submitting a completed Form W-4V – Voluntary Withholding Request. Once your request is processed, 10% of your benefits will be withheld for federal taxes. Also, you may be able to deduct some of the expenses of finding your next job.

Recognizing unemployment benefits on your tax return

After the first of the year you will receive Form 1099-G from your state’s Department of Labor and Employment containing the necessary information to complete your taxes. Form 1099-G will show the total amount of benefits received and any withholding. The unemployment benefits are taxable on your federal return.

Deductions Related to Your Job Search

You are entitled to tax deductions for expenses you incur in your job search. Deductible expenses include travel, resume preparation, printing, and postage. You can deduct job-seeking expenses as long as the amount of all miscellaneous itemized tax deductions is more than 2% of your adjusted gross income (AGI). To figure your tax deduction, subtract 2% of your AGI from the total amount of these expenses.

Make sure you keep the supporting receipts to make these claims. Job search expenses can be deducted as miscellaneous itemized tax deductions if you look for a job in the same field at the same level as the one you left. Job search expenses are deductible even if you don’t get the job.

Allowable Job Search Tax Deductions

You may be eligible for the following deductions while you’re searching for a job:

  1. Resume preparation: typing and printing, postage, long-distance charges, advertising, and professional resume preparation fees required for your resume.
  2. Travel: airfare, mileage, meals (based on either actual expenses or standard federal per diem rates) and lodging (actual expenses only) if the primary purpose of the trip is to look for a job and the taxpayer is away from home.
  3. Employment agency fees: While not a deduction item, the handling of agency fees can have an effect on your tax situation. 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.

Qualifying for Job Search Tax Deductions

To qualify for the deduction, your job search must be for a job in your current, or most recent, trade or business.

  • 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’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.

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 combined taxes and penalties for early withdrawal can be as much as 50% of the amount withdrawn when all penalties, federal and state taxes are combined. (Not all states have penalties or taxes.) The 401(k) withdrawal is considered income and may move you to a higher tax bracket, causing you to potentially lose other deductions or credits.

If you qualify for an exception, you may be able to avoid penalties. If you are withdrawing money from your 401(k) for medical expenses, you may be eligible for an exception. And if you are above the age of 55, you can make withdrawals from your 401(k) for other purposes as well.

This article was contributed by the Tax Pros at H&R Block.

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{ 3 comments… read them below or add one }

Brad Pitt December 17, 2010 at 3:18 pm

Taxes are big problems of consumers. This add up to what we which makes living more expensive. Filling taxes when unemployed must be abolished.

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Betsy @ ConsumerFu.com November 8, 2013 at 10:07 am

Good advice from tax experts. I have only been unemployed once and it actually did complicate our taxes a bit. It was many years ago – before the Internet made it a bit easier to find information like this.

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Tony February 24, 2014 at 6:16 am

I have been unemployed for years because of motor vehicle accidents. I am a construction worker and can no longer perform my job efficiently and is too old at age 60 to change career. I am tired of looking for employment in this field and in others without success. I am supported by my live-with-me fiancée and my older sons. What is the tax situation with people like me.

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