What tax tips do you have for the unemployed?
The current unemployment rate is 8.3%. So first, remember that you’re not alone. And when tax time comes around, make sure you take all the possible deductions. If you are looking for a job, you can deduct expenses like resume preparation, headhunters, postage and gas mileage. One critical caveat: You have to keep meticulous records and make sure you only claim legitimate expenses; If you try to deduct that interview suit, new haircut or manicure, the IRS will cry foul. One general rule of thumb to follow is that anything that can be used for purposes other than your job hunt can't be deducted.
Any other warnings?
Yes. You only qualify for tax deductions if you’re looking for a job within your industry. First-time job seekers like college graduates do not qualify; and neither do people headed back to the workforce after a long hiatus.
Job search costs must also exceed 2% of your adjusted gross income to qualify as deductible expenses, which shouldn't be a problem for most out-of-work job seekers, but could prevent some freelancers or self-employed taxpayers from being able to claim them.
And don't worry: You can still deduct the costs of a job search even if you weren't hired.
Any other deductions our listeners should remember?
Health care costs can be a major expense for many Americans, and unemployment can be a rude awaking after you’ve become accustomed to an employee-sponsored health plan with reasonable co-payments. After your health insurance coverage is extended for a few months by COBRA, you're on your own.
The good news is that you are allowed to deduct all un-reimbursed out-of-pocket medical expenses that exceed 7.5 percent of your adjusted gross income. That may seem like a high limit, but when you’re taking in a lower income, it’s easier to reach than you might expect considering all the medical expenses you can deduct, which include COBRA insurance payments or individual insurance coverage, out-of-pocket doctor's visits, unreimbursed hospital bills, prescription drugs, co-payments, and travel (mileage) for medical treatment. Again, be sure to save all your records and receipts.
Any other tips?
It might seem counterintuitive, but any unemployment compensation you receive from the United States government (both federal and state) is also taxable by the United States government. You have to claim those earnings. According to a survey, by H&R Block, nearly 40 percent of taxpayers had no idea that unemployment benefits were taxable.
To avoid the sticker shock of paying all of your unemployment compensation taxes in April, you can choose to have taxes withheld from your unemployment checks throughout the year. Just submit the appropriate tax documents to the office that sends you your benefits. As hard as it may be to budget, experts recommend you elect those withholdings on the front end.
And finally, although you’ll still have to pay taxes, you might qualify for free income tax filing. Anyone who has an adjusted gross income of $57,000 or less qualifies for free federal tax return through the IRS free file alliance program.