April 2, 2010
Despite some encouraging news about job creation Friday, there are still 15 million people out of work. Worries and misconceptions about taxes among the unemployed may be one reason Internal Revenue Service statistics show returns are coming in slower this year.
Through mid-March, the IRS received 68.7 million returns, 3 percent fewer than at the same time in 2009.
Some jobless may think they don't have to file if they didn't work throughout 2009. Others may have put off sending in their returns, fearing they owe taxes and can't afford to pay.
The reality is unemployment benefits are taxable income, and must be reported. And if you owe taxes and don't file, you'll end up making a big financial mistake that will cost more in the long run.
The silver lining is that a drop in income can make it possible to claim credits and deductions that were unavailable before, and could lead to a bigger refund than you expect.
Here are some tips for filing a return when you're out of work:
1. The first $2,400 in unemployment benefits is tax-free.
The 2009 stimulus bill exempts the first few unemployment checks from taxes. You should have received a Form 1099-G that lists your benefits. Make sure you subtract $2,400 from the total to figure out how much is taxable. If both members of a married couple filing a joint return are out of work, the tax-free amount doubles to $4,800.
2. The standard deduction may not be the best option.
Most taxpayers can choose whether to itemize. The standard deduction is easier, but not always the best choice, especially if you have a mortgage, high medical bills or other deductions. It's worth the time to calculate whether the standard deduction or itemizing will save you more.
3. Job-hunting expenses are deductible.
''You don't actually have to get the new job in order to deduct those expenses,'' noted Melissa Labant, a tax manager with the American Institute of Certified Public Accountants.
Among the expenses that qualify are career coaches and headhunters, job training programs, resume preparation and transportation to and from interviews. You'll need to have receipts and records to back up your claims, so take the time to gather the paperwork before you start on your return.
4. Monetary gifts aren't taxable.
If a family member or friend gave you money to help tide you over, you don't have to report that as income. Gifts may be taxable for the giver, depending on their circumstances, but the recipient is in the clear.
5. Debt forgiveness may create a tax issue.
Normally, debt that a bank or other lender forgives is considered taxable income. However, a 2007 law exempts up to $2 million of debt forgiven on your home through a restructuring or foreclosure. To qualify, that debt must have been used for a primary home -- any proceeds used to pay credit card bills, second homes, rental property or car loans, for instance, are taxable.
6. You may have to file as self-employed.
You don't have to work full time to be considered self-employed. Be aware that you might have to fill out an extra form if you picked up freelance or consulting jobs. Self-employment tax covers Social Security and Medicare for individuals who work for themselves, similar to what's withheld from paychecks.
7. You may qualify for the earned income tax credit.
This credit works on a sliding scale: If you have no children, you may claim it if you earned $13,440 or less. If you have three or more children, the income limit jumps to $43,279. Even if you didn't qualify for the credit in years past, it's worth checking out during a period of unemployment.
The EITC is a refundable tax credit. A credit is better than a deduction, because the amount is subtracted from your total tax bill. And with a refundable credit, if your tax bill is lower than the amount of the credit, you're entitled to a refund of the difference.
Similarly, a drop in income may make it possible to claim other sliding scale credits, like those for education spending, that you previously couldn't take because you earned too much.
8. If you pulled money from a retirement fund, you may owe.
Money stashed tax-free in a 401(k) plan or Individual Retirement Account is not only taxable when you take it out, you may also have to pay a 10 percent penalty if you're not at least 59 1/2 years old.
9. You may be able to file your return for free.
You may not have to spend a dime to do it yourself. If your adjusted gross income is $57,000 or less, you can file electronically -- and get your refund faster -- for free. The Free File program provides the software through a partnership tax software companies. Click on the Free File icon on the IRS home page, www.irs.gov, to pick from the software options.
10. If you owe taxes and can't pay right now, file anyway.
''For a person who is unemployed and strapped already, owing taxes come April 15 can be quite devastating,'' said Jack Nuckolls, director in the San Francisco office of BDO Sideman. But not filing your return will make matters worse. The penalty can be up to 25 percent of what you owe -- and you will rack up interest charges as well.
It's worth asking the IRS for more time to pay, Nuckolls said. The IRS offers installment plans and sources say the agency is being more lenient with unemployment so high.
Despite some encouraging news about job creation Friday, there are still 15 million people out of work. Worries and misconceptions about taxes among the unemployed may be one reason Internal Revenue Service statistics show returns are coming in slower this year.
Through mid-March, the IRS received 68.7 million returns, 3 percent fewer than at the same time in 2009.
Some jobless may think they don't have to file if they didn't work throughout 2009. Others may have put off sending in their returns, fearing they owe taxes and can't afford to pay.
The reality is unemployment benefits are taxable income, and must be reported. And if you owe taxes and don't file, you'll end up making a big financial mistake that will cost more in the long run.
The silver lining is that a drop in income can make it possible to claim credits and deductions that were unavailable before, and could lead to a bigger refund than you expect.
Here are some tips for filing a return when you're out of work:
1. The first $2,400 in unemployment benefits is tax-free.
The 2009 stimulus bill exempts the first few unemployment checks from taxes. You should have received a Form 1099-G that lists your benefits. Make sure you subtract $2,400 from the total to figure out how much is taxable. If both members of a married couple filing a joint return are out of work, the tax-free amount doubles to $4,800.
2. The standard deduction may not be the best option.
Most taxpayers can choose whether to itemize. The standard deduction is easier, but not always the best choice, especially if you have a mortgage, high medical bills or other deductions. It's worth the time to calculate whether the standard deduction or itemizing will save you more.
3. Job-hunting expenses are deductible.
''You don't actually have to get the new job in order to deduct those expenses,'' noted Melissa Labant, a tax manager with the American Institute of Certified Public Accountants.
Among the expenses that qualify are career coaches and headhunters, job training programs, resume preparation and transportation to and from interviews. You'll need to have receipts and records to back up your claims, so take the time to gather the paperwork before you start on your return.
4. Monetary gifts aren't taxable.
If a family member or friend gave you money to help tide you over, you don't have to report that as income. Gifts may be taxable for the giver, depending on their circumstances, but the recipient is in the clear.
5. Debt forgiveness may create a tax issue.
Normally, debt that a bank or other lender forgives is considered taxable income. However, a 2007 law exempts up to $2 million of debt forgiven on your home through a restructuring or foreclosure. To qualify, that debt must have been used for a primary home -- any proceeds used to pay credit card bills, second homes, rental property or car loans, for instance, are taxable.
6. You may have to file as self-employed.
You don't have to work full time to be considered self-employed. Be aware that you might have to fill out an extra form if you picked up freelance or consulting jobs. Self-employment tax covers Social Security and Medicare for individuals who work for themselves, similar to what's withheld from paychecks.
7. You may qualify for the earned income tax credit.
This credit works on a sliding scale: If you have no children, you may claim it if you earned $13,440 or less. If you have three or more children, the income limit jumps to $43,279. Even if you didn't qualify for the credit in years past, it's worth checking out during a period of unemployment.
The EITC is a refundable tax credit. A credit is better than a deduction, because the amount is subtracted from your total tax bill. And with a refundable credit, if your tax bill is lower than the amount of the credit, you're entitled to a refund of the difference.
Similarly, a drop in income may make it possible to claim other sliding scale credits, like those for education spending, that you previously couldn't take because you earned too much.
8. If you pulled money from a retirement fund, you may owe.
Money stashed tax-free in a 401(k) plan or Individual Retirement Account is not only taxable when you take it out, you may also have to pay a 10 percent penalty if you're not at least 59 1/2 years old.
9. You may be able to file your return for free.
You may not have to spend a dime to do it yourself. If your adjusted gross income is $57,000 or less, you can file electronically -- and get your refund faster -- for free. The Free File program provides the software through a partnership tax software companies. Click on the Free File icon on the IRS home page, www.irs.gov, to pick from the software options.
10. If you owe taxes and can't pay right now, file anyway.
''For a person who is unemployed and strapped already, owing taxes come April 15 can be quite devastating,'' said Jack Nuckolls, director in the San Francisco office of BDO Sideman. But not filing your return will make matters worse. The penalty can be up to 25 percent of what you owe -- and you will rack up interest charges as well.
It's worth asking the IRS for more time to pay, Nuckolls said. The IRS offers installment plans and sources say the agency is being more lenient with unemployment so high.
Closed November 2010