Unemployment continues to be a serious issue for many families in the United States. Not only does unemployment cause day-to-day stress, it also poses an unusual situation when filing your annual income taxes. As unfair as it may seem, unemployment income is taxable income. If you've been unemployed during the past year, it's essential that you read the following tips to be sure of filing your taxes properly. You've been through enough - the last thing you need is an audit.
1. Watch for Form 1099-G
Do not file your taxes until you receive your copy of Form 1099-G. This form lists the total unemployment insurance (UI) benefits paid to you during the year in the first box. You must have this information before filing.
2. Consider All Sources of UI
Unemployment income can come in a variety of forms and from a variety of sources. Make sure you are counting unemployment income from all of the following sources.
- State unemployment compensation benefits
- Federal unemployment trust fund benefits
- Disability payments, which are sometimes paid as a substitute for unemployment benefits
- Railroad unemployment compensation benefits
- Trade readjustment allowances
- Disaster relief and Emergency Assistance Act benefits
3. Identify Union Benefits
If you are a member of a union, you may have received unemployment benefits paid out of union dues. If this is the case, you will need to report these benefits to the IRS. There is an exception to this rule: if you have been making nondeductible payments to a special union fund, you will be required to report only the benefits you have received that exceed the amount you have contributed. You may wish to contact a tax professional for more information on this particular situation.
4. Withhold Taxes
To save yourself the stress of owing income tax, you can make arrangements to have income tax withheld from your benefits. To exercise this option, fill out a Form W-4V and file with your local paying office. Once this form has been filed, 10 percent of your benefits will be withheld for taxes. When you file your tax return, any overpayment will be returned to you in the form of a federal tax refund.
5. Estimate and Pay Throughout the Year
Another option available that can keep you from getting hit with a large tax bill is to make smaller estimated payments to the IRS throughout the year, much in the same way a business owner would. This will make paying taxes less stressful and could lead to a refund when you file your annual taxes.
6. Take Advantage of Your Spouse's Withholding
If you are married and your spouse is employed, you may find that you can avoid the hassle of making tax payments by simply increasing the withholding on your spouse's income. Additionally, your spouse may qualify for the Earned Income Tax Credit (EITC), which can grant you a significant break on your taxes. The EITC was specifically designed to help people who aren't earning as much money as they once were. Although you may not have qualified in the past, your reduction in income could qualify you now.
7. Keep Receipts Related to Job Search Expenses
Any expenses you accrue while hunting for a job may be tax deductible. These include:
- fees paid to employment agencies
- fees paid to professional resume services
- mileage and tolls paid while driving to interviews
There are limits and exceptions to which job-seeking expenses you can claim. Contact a tax professional to make sure that any deductions you are attempting to itemize and claim are legitimate.
Jessica Bosari is a freelance writer and blogger for various publications and her own blog. You can read more of Jessica's work here. If you have any comments or questions about SavingTools or about saving money, leave your comments in the form below or email firstname.lastname@example.org. Thanks!