April 6, 2011
Attention all those unemployed: It’s time to pay the hand that fed you. Yes, any unemployment benefits you received last year are taxable income. Your state department of labor should have sent you a 1099-G form detailing how much you “earned” in benefits and the amount of taxes deducted. This information goes on line 19 of the 1940 or line 3 of the 1040-EZ.
There are currently 12.7 million unemployed Americans and 6,160,824 tax returns were filed on unemployment benefits in 2008, the latest data available. A 1099 is the same form given to independent contractors, meaning that you are responsible for paying taxes steadily throughout the year and if you wait until tax time, you may be subject to penalties if you expect to owe the IRS $1,000 or more in taxes. Generally when filing for benefits, your state’s labor department will give you the opportunity to have taxes withheld, typically some 10 percent of your weekly benefit check. In New York State for example, $40 is taken out of the maximum weekly benefit check of $405. “Some people feel that it can be hard to live on unemployment benefits, so they don’t opt to have taxes deducted, only to have a large annual obligation,” says Rus Garofalo, founder of the Brooklyn-based tax firm Brass Taxes, who often works with freelancers and artists.
Now that it’s tax time, after a full year of claiming benefits, if you didn’t have taxes taken out of your weekly benefits, you might find yourself slapped with a hefty federal income tax bill, not to mention your fiscal responsibilities to your state — and city, in some instances. One New York State resident found she owed $2,000 at tax time after collecting a full year of benefits. Plus, the first $2,400 of benefits are no longer exempt, unlike in 2010. But not all the news is bad: Several of the deductions and tax laws that apply to all taxpayers are especially helpful to the unemployed. Here are six tips you need to know as you file.
Job-seeking deductions. Those trips to the copy shop for faxing and Xeroxing? A-ok. Job fairs — both the admission fee and the mileage? Absolutely. Your meals while traveling for job search reasons? To a point. Job-search agency and resume writing services also count as legit deductions — just as long as you’re not a first-time job seeker or returning to the workforce after several years in which you weren’t looking for work. Remember that regardless of your employment situation, you may only deduct the amount of qualifying expenses that exceed 2 percent of your gross adjusted income. And while a haircut, a new Armani suit or a manicure may feel essential for job hunting, they don’t count as income tax deductions.
Moving for work. Moving expenses are deductable as long as you moved at least 50 miles for a job — so nomadic New Yorkers and Chicagoans cannot deduct expenses if they moved between neighborhoods. Movers, boxes, storage space, travel are all eligible. To qualify for the deduction, you need to stay at that address for at least 39 weeks during the following tax year.
Student loan deduction. Younger workers have been hard hit in recent years by unemployment. One bright spot: You can deduct any interest paid on student loans. Your loan providers should have sent you this information in a 1098-E. People filing using either a standard deduction (a pre-set amount determined by your tax status) or going itemized can avail themselves of this.
Retirement account funds. If you need to withdraw from a retirement account, setting up a SEPP (substantially equal periodic payments) plan will allow you to withdraw a set annual amount for five years or until you turn 59.5 without a 10 percent tax penalty.
Money from Grandma. It’s great to get a little help when you’re out of work. But sometimes that assistance is taxable, says Garofalo. “Many forget that some grants, scholarships and other gifts count as taxable income.” In taxation terms, a “gift” is something given of value to another person. But there are many exceptions. If the gift is under $13,000, you don’t need to claim it, and in some cases gifts worth more than $13 grand, like a new car, the giver is responsible for the taxes. Gifts to a spouse, a political organization, medical or educational organizations are exempt.
Consult a tax professional. Free tax preparation services are available from the IRS’s website for anyone whose adjusted gross income is less than $58,000 — which almost certainly applies to you if you’re living off unemployment benefits.
This piece was updated on April 10, 2012