Do You Have to Pay taxes on Unemployment Income?

Finding Out if You have to Pay Taxes on Unemployment Benefits

Unemployment remains high and is still in the double digits in some states, but many Americans are filing taxes while unemployed for the first time. 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. But does the government assist those who are unemployed?

Even 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 than when you were working, you may qualify for more deductions or different types of credits 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-4′ 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.

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. H&R Block and TurboTax have online tax prep software for filing your taxes yourself that can help you accurately claim your deductions, credits and job-hunting expenses automatically.

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.  Learn about all the Job Search Deductions you may be able to take this year.

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.

In addition to getting a tax deduction for your job search, you may also want to look into some additional education or skills training that can help you land a job. Outdated job skills can prevent you from getting a job in many cases.

Earned Income Tax Credit

The Earned Income Credit (EIC) is a valuable credit for lower-income taxpayers who work. 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). It provides a tax credit for one child of up to $3,050. 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.

 

Taxes can be a real headache and I do not recommend just doing them on your own. I have used both TurboTax as well as H&R Block and they are so much better than going it alone, they also have options to help you file your taxes online for free. Keep in mind that the only way you can really file them for free is if you do not have anything to itemize on your return and no deductions yet.


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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.

4 comments
human resource benefits
human resource benefits

I really wanna tell that expectation always hurt, not knowing the proper information about taxes and letting it very easy, always underestimate us.All the deduction are unexpected, i really want to thanks you for giving the information, and awaking us from the root of the taxes.

RecardoMandy
RecardoMandy

my buddy's ex-wife makes $88 every hour on the computer. She has been without work for seven months but last month her paycheck was $20148 just working on the computer for a few hours. Read more here http://lazycash23.com

F_the_GOV
F_the_GOV

I hate the government! It's time people start standing up to the dictators in Washington and State. My Federal Taxes for being unemployed is $828.00 for federal and the state of Colorado wants $382.00 from me. I'm still unemployed so where am I supposed to get the money to pay this? Since I can't pay this on time they are charging me payment penalties and interest. Like any good for nothing creditor they want to suck me dry finically without concern. They don't give a shit about us or the families we have to feed so why do we give a shit about lining their wallets when they don't use our money appropriately or responsibly. I say fuck'em and bring it. You want my fucking money GOV your gonna have to pull it out of where the sun don't shine. Many other countries are starting revolution so why aren't we? We need leaders and followers to march down this path of righteousness. Who's with me? 

Modest Money
Modest Money

It would be nice if the government gave unemployed people more of a break on taxes.  At the same time, I guess they do need to cover for situations where someone is making decent money for part of the year and then getting unemployment benefits.  Perhaps there should be some kind of stipulation for people in situations like Carline's.

Carline
Carline

I'm unemployed going on two years. It's a burden to have to pay tax on what is already not enough to live on.

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