Tax concerns of the unemployed
Monday, January 26, 2009
Today's media reports are full of horrible employment news.
Heavy machinery giant Caterpillar says it will eliminate 20,000 jobs (12,000 employees and 8,000 contractors).
Sprint Nextel says 8,000 of its workers will be out of work by March 31.
And the housing-dependent Home Depot plans to lay off 7,000 workers, including positions that will be lost when it closes its Expo Design chain.
If you're thinking it's just workers lower on the job ladder that are in danger, think again.
The dismal economy is knocking people off all employment rungs. The Wall Street Journal even has a feature, Laid Off and Looking, which follows eight out-of-work MBAs as they search for jobs. Unfortunately, when you're trying to pay your bills, knowing that you're not alone is little comfort.
And then there are the associated tax complications.
Not to rub salt in the wound, but the tax code often causes additional problems for unemployed folks.
Taxable unemployment benefits: The biggest issue confronting out of work folks is that unemployment compensation is taxable.
Yep, it's considered a wage payment.
Even if you know this -- the unemployment office should have pointed out this sad fact to you when you applied for the benefits -- you likely will be in a situation where you can't afford to give up any of the unemployment payment. So you'll probably opt to not have any taxes withheld and worry about them later, like when you file your next tax return.
Self-employment taxes: If you decide to use your job loss as an opportunity to finally start your own business and succeed, fantastic!
Just remember to pay your self-employment taxes. Not as many people will be paying as much attention as they did to wannabe Treasury Secretary Timothy Geithner's SE tax mistake, but you can bet the IRS will be watching.
Deductible job search costs: One tiny bit of good tax news is that your job hunting expenses might be tax deductible. The big proviso here is that you look for work in the same field. You can't use Uncle Sam's limited help to completely switch career gears.
Such costs include printing resumes, mailing them out, traveling to job interviews and even career counseling.
But I use the descriptions "tiny bit" and "limited" when it comes to tax help here because these expenses are counted as part of the miscellaneous group on Schedule A.That means you:
- Must itemize instead of claiming the standard deduction and
- Have enough miscellaneous costs (job search and otherwise) to exceed 2 percent of your adjusted gross income.
That income threshold might be easier when your AGI has dropped dramatically because you no longer have a job. But from a practical standpoint, your job hunting expenses, like the rest of your budget items, are probably going to be scaled down, too.
Still, every little bit help, especially in such a trying time.
Here's hoping that none of you has to worry about these unemployment-related tax issues, but it's always better ot have the tax info and not have to use it.
Great Depression era unemployment line
Photo courtesy James R. Cox Collection, 1923-1950,
Father Cox, Archives Service Center, University of Pittsburgh
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