Even though the economy is in recovery, the average length of unemployment is currently at 36.9 weeks, which is a long, slow slog for anyone searching for a job.
As if the unemployed don’t have enough to worry about, there are tax implications to prolonged unemployment (not all of them bad). Here’s what you need to know about filing your taxes while jobless.
1. You owe taxes on your unemployment benefits.
If you’ve never received unemployment benefits before, you may not know that Uncle Sam considers that money to be earned income — and therefore taxable. To pay these taxes, you have two choices: have money withheld from each check (just like you did from your regular paychecks), or collect your full pay and pay your taxes later.
For many people, it makes more sense to receive the full benefit checks, since you’ll already be making do with a lot less than what you earned at your former job. This makes even more sense if you take advantage of some of the tax breaks available to those looking for work, since they can help to reduce your tax burden.
2. You can deduct your job search expenses.
If you’re searching for a new position in the same field you worked in before, then you can deduct some of your job search expenses from your income for the year. (If you’re changing your career field, however, your expenses aren’t deductible).
Qualified expenses include the costs associated with preparing your resume, traveling for interviews and job searches, and paying fees to employment agencies. However, the cost of purchasing new clothes and makeup could be seen as a red flag to the IRS; in general, you can’t deduct the cost of anything that could also be used for something other than a job search.
Your job search expenses must be itemized and must exceed 2% of your adjusted gross income in order to qualify.
In addition, it’s important to note that new college graduates and workers just re-entering the workforce after a prolonged absence (such as a former stay-at-home parent) aren’t eligible for these deductions.
3. You might be able to tap your retirement account without penalty.
Although this should be saved as an absolute last resort during your prolonged unemployment, Uncle Sam will allow those in dire financial straits to take a distribution from their retirement accounts without paying the early withdrawal penalty. (Normally, this is 10% of the withdrawal amount, if taken prior to age 59.5.)
The IRS waives this penalty if you need the money for un-reimbursed medical expenses that total more than 10% of your income, or for “an immediate and heavy financial need.”
Don’t forget, however, that you’ll still owe taxes on your distribution, which can make tax day even more painful.
Do you have any other tax advice for the long-term unemployed?