How to File Taxes When You Are Unemployed
When you are unemployed, you may think that you don’t have to file taxes because you didn’t receive an income. However, it may still be beneficial for you to be thinking about filing taxes unemployed. When filing taxing unemployed, you may still qualify for certain tax breaks.
Tax Tips for the Suddenly Unemployed
If you worked for part of the year and are not unemployed come tax time, it may be a little confusing. There are plenty of different tax tips for filing taxes unemployed, whether it was sudden or you didn’t work for most of the year.
File the Return
It can actually be very easy to forget to file a return, especially if you have been unemployed for a long time so the main thing is to remember to file.
File Early
You don’t want to delay filing taxes unemployed because you may have a refund coming. Those who are unemployed may move into a lower tax bracket. This means withholdings from your job could have been too high and you get a sizable return. That is why you should file your taxes early.
Take Advantage of Government Benefit Programs
Some of these government programs are tax-free. Federal, state, and local governments distribute a trillion dollars in benefits. Government benefits programs can reduce day-to-day expenses and can include food assistance, low-cost gas and other utilities, low-cost auto insurance, health insurance, and unclaimed funds.
Deduct Your Job Search Expenses
One of the perks available to unemployed people who qualify is being able to deduct job search expenses. However, this deduction is no longer available on the federal level but it may be on the state level. Some expenses include travel and transportation expenses connected to the job search or employment agency fees. Job-hunting expenses are grouped as miscellaneous itemized deductions but you may want to speak with an accountant about the best ways to do this, in order to avoid being audited.
With changes in the tax code, sometimes you are not able to deduct these expenses. Moving expenses can also be deducted if you are successful with your job search but you have to move away from your current home for your new job, but only for certain jobs and there are restrictions. You won’t be able to deduct any expenses related to job searches if there is a big break between employment dates. However, there is no definition for what this substantial break means. It’s best to consider a year or less not substantial.
Consider a Home Office Deduction
When you are unemployed, you might be taking on work on a freelance basis. If you are working as a paid contractor or freelancer from your home then you may qualify for a home office deduction. The IRS lets you deduct insurance, utilities, maintenance, repairs, and depreciation, but only if you have a space that is dedicated for your business use. How much you are able to deduct will be based on the size of your home office compared to the overall square footage of the home.
Consider Different Tax Breaks
Depending on your income level, if you lose your job you may then qualify for some additional tax breaks. The earned income tax credit is a tax credit for those who are working with low to moderate income. If you have earned money through self-employment or wages before losing your job then it’s possible that you may qualify for this credit. Unemployment benefits don’t count as earned income so if you didn’t have any earned income then you may not be able to claim the credit. Eligibility will also depend on other factors, including the number of qualifying children you are able to claim and your filing status.
The child tax credit and the child and dependent care credit may also be available. If you have to pay someone else to watch your children or dependents while you are looking for work then you may qualify. The percentage is based on adjusted gross income for both you and your spouse if you file jointly. You both need to have earned income in order to claim the credit. If your only source of income is unemployment benefits then you aren’t eligible to claim this credit. Another credit to consider is the retirement savings credit. You could be able to take credit for eligible contributions to your IRA or employer-sponsored retirement plan.
Don’t Forget about Your Job Termination Income
If you got severance pay then this is going to be fully taxable in the year you receive this income. The amounts are going to be included in your W-2 form so don’t forget to include this income.
Consider if You Have Self-Employment Taxes
If you are unemployed then you may be looking at some self-employed income. You then need to learn a new set of tax rules that come along with this. For the most part, this is only a few extra steps. Report your expenses on Schedule C or Schedule F. Even if you have picked up just a few odd jobs, you will still need to use the correct tax form so you can pay Social Security and Medicare taxes on any self-employment income you receive.
Income Requirements for Filing a Tax Return
Even if you did earn some income last year, if it goes below the IRS minimum then technically you don’t have to file a tax return. The minimum income amount varies according to your filing status and your age. It’s important to note whether you are head of household, filing jointly with your spouse, or you are claiming someone as a dependent on your taxes. The IRS also adjusts the minimum amount of earned income from year to year because of inflation. Individuals who do fall below the minimum may still need to file a tax return under different circumstances.
For example, if you did have $400 in self-employment earnings then you still have to file a tax return and pay self-employment tax. However, if you don’t have any income then you aren’t obligated to file. Keep in mind that even if you didn’t work during the year, you may not have earned income but you might still have some unearned income from dividends or interest. You need to include any additional compensation when you file. This may include cash payments or severance pay for accumulated sick leave or vacation. You also need to report any income reported on your W-2 you got from your former employer during the year.
Do You File Taxes on Your Unemployment?
Unemployment compensation is considered taxable not only by the IRS but also by most states too. If the total amount of income for the year, including your unemployment, is more than the minimum amount required to file then some of it can be taxed. If you don’t want to be surprised with a tax bill when you file then it’s possible to have some taxes withheld from unemployment income during the year or you are able to make estimated payments. While you don’t have to do either, you can make this choice. If you want to have some income withheld from unemployment compensation then use Form 2-4V, which is the Voluntary Withholding Request. You can use a tax-withholding estimator in order to calculate what you need to withhold.
Do You Have to Pay Taxes if You File a Return?
Keep in mind that filing taxes doesn’t mean that you owe taxes. When you do file taxes, it lets the IRS know about your life situation, annual income, and any credits or deductions you qualify for. This is why you need to file a tax return that you can receive a refund. You won’t get a refund without filing taxes and with your new tax situation of being unemployed, you may get a bigger refund than you were expecting.
How Unemployment Affects Your Taxes
While you don’t have to pay Medicare or Social Security taxes on unemployment benefits, you do have to report them. While you may also be entitled to a bigger refund thanks to being in a lower tax bracket while unemployed, you can also increase your current after-tax income by adjusting your spouse’s withholding. If your spouse currently has his or her withholding based on the assumption you are both earning an income then he or she is having too much withheld for current conditions.
Your working spouse should file a new W-4 to adjust the amount of income tax withheld. While you are unemployed, if you are taking classes or upgrading your work skills then it may help you get a job faster and can help you lower your tax bill. You can qualify for an education tax credit, even if classes are not part of a college degree program. Being unemployed changes a lot about your tax situation, including your withholding and total income. It’s more important than ever to make sure you are correctly estimating your taxes.
What Documents Do You Need to File Taxes?
While filing taxes unemployed, just like you would with a full-time job, there are documents and information you will need handy come tax time.
Personal Information
Your tax identification numbers are going to be important when filing taxes. You also need to have your Social Security Number, as well as your spouse’s Social Security Number or tax ID.
Dependent Information
If you are a parent or caregiver then you will need to also gather some information on your dependents. Have the Social Security Numbers and dates of birth, childcare records, including the provider’s tax ID number, and income of adults in your home.
Sources of Income
The forms you need will be different every year. You will need a W-2 if you were working at all during the year before you were unemployed. State unemployment divisions will give you an IRS form 1099-G if you are getting unemployment benefits during the year. In Box 1, you will be able to see the total amount of compensation reported. When you get benefits, you can also have the option to withhold income taxes and if you do so then you will see the total amount withheld in Box 4 and the state withheld in Box 11.
There are also plenty of other income sources to consider. For example, if you are self-employed and have self-employed income then you need Forms 1099 and income records that are used to verify amounts of income not reported on 1099s. You also need records of all expenses and records of estimated tax payments made. If you have rental income, you need records of income and expenses and rental asset information, as well as records of estimated tax payments. Retirement income can include a 1099-R or a 1099-SSA. Savings and dividend income will also come with different forms. These may be in the form of a 1099 form, depending on whether it’s interest or dividend income. Other income sources include gambling income, hobby income and expenses, prizes and awards, trusts, records of alimony paid, and any other 1099s received.
Types of Deductions
The paperwork you need for deductions will depend on what type of deductions you are taking. The types of deductions you are taking are going to be dependent on your life situation.
For home ownership, you need to have a Form 1098 and other documents about your mortgage interest, real estate and personal property tax records, and receipts for any home improvements involved with energy savings.
For charitable donations, you need the amounts donated and records of any non-cash charitable donations.
For medical expenses, you need amounts paid to dentists, doctors, and hospitals. You can also deduct childcare and education expenses so keep fees and information related to these expenses on file.
What Happens if You Are Unable to Pay Taxes While Unemployed?
When money is tight while unemployed, the last thing you want to do is pay a large tax bill. If you think you owe money while filing taxes while unemployed, you still need to file anyway. If you don’t file then you can face expensive penalties down the road and make your tax situation even worse. You are able to file tax extension options but this won’t eliminate your obligation to pay the taxes.
However, the IRS does give you several payment plans. The best measure to take, especially if you think your financial situation is going to get better, is to ask the IRS for a repayment plan. If you qualify then it’s possible that you may be able to settle tax debt for less than your full amount. One of your other options as someone who is temporarily unemployed is to temporarily delay the collection process. You are able to fill out Form 433-F, which is a Collection Information Statement, and give proof of your current financial situation.
Avoiding Taxes on Unemployment
Since taxes aren’t automatically taken out of your unemployment you have to take some action so you can ensure that you aren’t faced with a huge tax bill the next time you file your taxes. Tax saving tips can help during this time. Some states will also tax your income. States such as California, Alabama, New Jersey, Virginia, Pennsylvania, and Montana don’t have jobless benefits as taxable income. There are also nine states without income tax that also don’t tax jobless benefits.
When you are filling out unemployment benefit forms, pay attention to the forms you are signing. Some states do incorporate withholding during the signup period but others may not. How much tax you will need to withhold from your unemployment benefits will also depend on how much you have worked during the year and other income streams you may have.
Everything About Taxes in One Place.
Use the withholding estimator
Some people have unemployment while a spouse is working or have a side gig so it is going to depend on your personal situation. Use the withholding estimator on the IRS website in order to stay on track. Once you use the withholding estimator then you may find that the standard withholding that can happen in certain areas isn’t enough.
If this is the case, or you don’t want to take the standard withholding, then make quarterly payments in order to manage your tax liability throughout the year. You pay these every three months but you are going to have to calculate the estimated payments on your own. When doing these payments, make sure that you are going to have this information come tax time so you know how much you have already paid and aren’t going to get yourself in a worse financial situation.
Final Thoughts
Filing taxes unemployed can seem overwhelming but it’s important. Keep in mind that that you may not necessarily have to pay taxes but if you want to receive any sort of refund, you do need to file your tax return. Filing taxes unemployed may mean you actually get a bigger refund since your financial situation has changed. When do you do file taxes when you get unemployment benefits, you will have to pay taxes on this. Using a tax estimator can allow you to withhold some of your unemployment benefits so that you don’t have a huge tax bill.