If you find yourself out of work, taxes may be
the last thing you want to think about, but it’s important to continue your tax and other financial planning, even when you’re
unemployed. The Connecticut Society of CPAs offers practical tips that will help you address
tax concerns during your job hunt.
Tip 1:
Your Unemployment income Is taxable
Did you know that unemployment benefits are
subject to both federal and, depending on where you live, state taxes? That’s
an important fact to keep in mind so that you stay within your budget and
aren’t surprised by a larger-than-expected tax bill in April. You must report
and pay taxes on any kind of unemployment income, including both state and
federally funded benefits. If you request it, the federal government will withhold
10 percent of your unemployment income toward your taxes. This is worth
considering, since it will help prevent you from spending money that should be
set aside for taxes. It will also allow you to avoid the paperwork involved in
determining and paying quarterly estimated taxes on your unemployment income.
Tip 2:
Don’t forget to file a tax return
Filing your tax return may seem unnecessary if
you aren’t earning income, but it’s still likely
required, depending on your gross income, filing status, and age. Keep in mind
that any severance benefit or vacation or sick pay you received when you were
laid off will be included in your taxable income. On the upside, if you worked
for part of the year and had taxes withheld or paid estimated taxes while
employed, you may actually be due a refund due to your subsequent drop in
income.
Tip 3: You
may be eligible for tax benefits and credits
A lower income may help you qualify for a
variety of programs, including the federal Earned Income Tax Credit (and
similar state and local credits available in 22 states, the District of
Columbia, New York City, and Montgomery County, Maryland), which can lower your
taxes or even provide a refund, depending on your income level and the number
of children you have. Other credits that may reduce your federal tax outlay
include the Child Tax Credit and the Child and Dependent Care Credit. Your CPA
can offer advice on the tax and other benefits that can improve your financial
outlook while you’re looking for work.
Tip 4:
Keep receipts for costs related to your job search
Travel expenses for a job interview, the costs
of résumé preparation and mailing and outplacement agency fees are just some of
the expenses you may be able to deduct. Moving expenses may also qualify if
your move is closely related to the start of your work and you meet the
distance and time requirements.
Tip 5:
Learn about self-employment taxation
There’s good and bad tax news for people who begin
consulting or set up their own business when they find themselves out of work.
You should be able to deduct many of the ordinary and necessary expenses
related to starting up and running a new business, including costs associated
with a home office or the business use of your car. But, since you won’t have
an employer withholding taxes for you, you will have to make quarterly
estimated tax payments on your self-employment income. That will include paying
the full cost of self-employment taxes as well as income taxes.
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