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Unemployed? You still could face tax issues

This post was updated Friday, June 1, 2018

Unemployed by winnond via FreeDigitalPhotos_ID-10055840If you're out of work, thank you for taking a break from LinkedIn and job hunting sites to stop by the ol' tax blog.

I wish you the best in your job search.

But I also must provide some unwelcome news. Even when you're unemployed, you're likely to still face some tax issues.

Paying tax on unemployment: First, the biggie. Unemployment benefits are taxable income.

Wait, you say. You heard some unemployment is tax-free. Sorry. That info is not quite an urban legend; it's just outdated.

A few years ago, as the Great Recession's effects started being felt, Congress in 2009 decided to make up to $2,400 in unemployment benefits tax-free.

But that tax break was for one tax year only. In 2010, the prior tax treatment of assistance for those out of work was back in full force, again making all — yes, every single penny — of unemployment benefits taxable.

That means that you must report as income all your unemployment benefits on your annual tax return. To ensure that happens, you'll get a Form 1099-G, a copy of which is sent to the Internal Revenue Service, showing your unemployment compensation in box 1.

You have the option when you apply for benefits of having the tax withheld, but most folks don't. That's understandable. You're already taking an income hit, so you need all you can get to go toward your living expenses.

But know that if you don't pay tax on unemployment via withholding or estimated tax payments, you could face a tax bill, and possible underpayment penalties, when you file your return.

So run the numbers on your unemployment and other income before filing season arrives to at least get an idea of where you'll stand tax-wise.

Examine the EITC: Now for a tiny bit of good jobless tax related news. Since your income has dropped, you now might qualify for the Earned Income Tax Credit, or EITC.

This tax break is for folks who work (or worked for part of the tax year), but didn't make that much money. A widespread misconception is that the EITC is only for folks with kids. Not true. While filers with families can bet a bigger benefit, single taxpayers also qualify.

The amounts to qualify and how much you might be able to get via the EITC are adjusted each year for inflation.

For the 2018 tax year, you qualify for 2018 EITC benefits if your earned income and adjusted gross income (AGI) each are less than:

  • $49,194 ($54,884 if married filing jointly) if you have three or more qualifying children
  • $45,802 ($51,492 if married filing jointly) if you have two qualifying children
  • $40,320 ($46,010 if married filing jointly) if you have one qualifying child
  • $15,270 ($20,950 if married filing jointly) if you don't have any qualifying children

And an EITC claim on your 2018 tax return could get you up to:

  • $6,431 if you have three or more qualifying children
  • $5,716 if you have two qualifying children
  • $3,461 if you have one qualifying child
  • $519 if you don't have any qualifying children

For specifics on your situation — whether you qualify and if so for how much — check out the IRS' interactive EITC Assistant.

The online site looks to still be keyed to the 2017 tax year. That's understandable since some folks got an extension to file last year's return and could come to the IRS website for help doing that, including making an EITC claim. But the online calculator will give you an idea of where you stand.

Other unemployment-related tax help: While you no longer can count the costs you incur looking for a new job as an itemized tax deduction under the Tax Cuts and Jobs Act's changes, there still are a few other tax breaks for the unemployed.

If you turned your job loss lemons into entrepreneurial lemonade, there are quite a few small business tax breaks you can claim. Also check out the new tax law affects business expensing and depreciation, as well as its 20 percent deduction for pass-through entities.

You also might be able to tap retirement accounts to make ends meet. But think long and hard about doing this. It's generally a last- and worst-case option because you'll likely end up owing taxes on any tax-deferred contributions and/or earnings.

I hope some of this tax information, although not necessarily welcome, is helpful in this difficult time. The last thing you want right now is to have to worry about taxes, too.

I also hope you find a job that you want soon — the information in my moves to make (+ tax tips!) if you've lost your job post might help — so that you no longer have to think about the tax implications of unemployment.

"Unemployed" by winnond via

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