Despite a generally improving labor market in 2012, there are still many Americans who have been out of work or lost jobs in the last year.
And while you may think not having an employer means not having to file income taxes, think again.
For starters, unemployment benefits are technically an income source and must be reported to the Internal Revenue Service.
Furthermore, if you are unemployed there may be some credits or tax breaks that can reduce your overall tax burden. Being jobless is no picnic, but keep in mind the tax code is sympathetic in many ways — if you know what to look for and what to file.
Here are five important tax tips for the recently unemployed:
Report all compensation: If you received unemployment benefits, there should be a Form 1099-G in your possession to report your “income.” Benefits include not just state disbursements from the Federal Unemployment Trust, but also any disability payments or assistance that falls under the Disaster Relief and Emergency Assistance Act. Also keep in mind that if you are in a union, certain dues paid back to you as an unemployed member can also apply. Circumstances vary; ask your union rep for specifics.
Earned Income Tax Credit: The tax code is structured to benefit workers who earn very low wages, so losing your job may qualify you for the Earned Income Tax Credit. The ceiling of $13,980 is very low for a single, childless taxpayer. But with two children you can qualify for the EITC with less than $41,952 in 2012 earnings. Check the IRS guidelines on the Earned Income Tax Credit for more info and thresholds. And remember, unemployment benefits do not count toward eligibility — only your regular wages. That may make this credit within reach.
Hardship retirement withdrawals: If you had a particularly bad year that included a host of unreimbursed medical expenses or more than 12 consecutive weeks of unemployment compensation, chances are you dipped into your IRA retirement account. Typically these savings plans penalize any early withdrawals 10%, but you can claim hardship with the IRS to waive this fee. Furthermore, a workplace retirement plan like a 401k can be tapped if taxpayers can show the IRS “an immediate and heavy financial need” — typically threat of foreclosure or eviction, or unavoidable medical expenses. Obviously accessing retirement funds early is never ideal, but at least you can avoid paying a harsh penalty for the act.
Job hunting costs: Did you pay a babysitter to watch the kids so you could go to an interview? Did you pay dues in a trade association to network? Did you travel significantly to visit a career fair or attend an interview? Well, I hope you kept the receipts for all of these transactions, because they are tax-deductible … even if the job offer never came to fruition.
Think ahead: Unless you filed a Form W-4V, a voluntary withholding request, there may not have been any income tax withheld from your 2012 unemployment benefits. That could mean a tax bill instead of a return in some cases. If you’re still on unemployment and concerned about what your burden will be next April, then file the W-4V (available here on IRS.com) to withhold up to 10% from your future payments. Granted, this will result in smaller regular payments, but you can spread out the impact across a longer period of time so the tax burden is easier to bear.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.