Five Tax Tips for the Unemployed

With just over 8% of the American work force currently unemployed, with no projected change in the next year and a half, I thought it might be a good time to review the tax implications of unemployment.

  1. Yes, you do have to claim unemployment benefits as taxable income.  You should receive a 1099-G form which will show the total amount of unemployment benefits received at the end of the year.  If you choose, you can have federal taxes withheld from your benefits by completing a Form W-4V and giving it to the agency paying your benefits.
  2. If you withdraw money from a retirement account (such as an IRA or a 401k plan) during a period of unemployment (or really any time before age 59 1/2), you will be taxed on that withdrawal, as well as be liable for a 10% penalty on the withdrawal.
  3. However, unemployment benefits are not considered earned income when it comes to the Earned Income Tax Credit, or EITC.  This fully refundable tax credit can be a real lifesaver to people with minimal income in a particular year, especially if you have children.  See the IRS EITC info page for the income cut-off levels for the EITC.
  4. If you itemize deductions, and you are looking for a job within your current occupation, you can include job search expenses (including hiring employment or outplacement agencies, travel to interviews, and resume’ preparation and mailing expenses) in your miscellaneous deductions on the schedule A form.
  5. If you find a new job which is 50 miles or more away from your previous job, and you choose to move, moving expenses are deductible on your taxes.  (Unless, of course, your new employer pays for your move.)

Unemployment is a difficult time–but being prepared for what might meet you at the end of the year when you file your taxes can help ease some of the stress.