Key Takeaways
- File your tax return early, because you may have moved into a lower tax bracket and you may have a refund coming.
- Losing your job may open the door to some additional tax breaks, including: Earned Income Credit, Child Tax Credit, and the Child and Dependent Care Credit.
- Any severance pay, including payment for unused vacation or sick days, is fully taxable to you in the year that you receive it.
- You should receive a copy of Form 1099-G from your state telling you how much unemployment compensation you received during the previous year so you can report it on your tax return.
Taxes for the unemployed
If you recently lost your job, chances are your income has dropped dramatically. That means your tax status has likely changed as well.
You may now qualify for credits and deductions available only to lower-income taxpayers. But you may also have to pay taxes on income other taxpayers don’t have. So take charge of your situation. Find out how to manage you taxes while you search for your next job.
1. File your tax return
Sounds obvious, doesn’t it? Yet, if you’ve been unemployed for some time, it can be easy to forget to file a tax return. If you lost your job mid-year, you’ll need to file if your 2024 income exceeds $14,600 (Single filer under age 65) or $29,200 (Married Filing Jointly filer under age 65). These amounts are up from $13,850 and $27,700, respectively, in 2023.
2. File early
Don’t delay filing your tax return. You may have a refund coming. The reason is simple: People who have lost their jobs often move into a lower tax bracket. This means the withholding from your former job was likely too high, possibly resulting in a sizable refund at tax time.
3. Take advantage of government benefit programs, some of which are tax-free
Every year, federal, state, and local governments distribute $1.8 trillion in benefits. From money for food to health care plans, there are government benefit programs that can reduce your day-to-day expenses. Some of the money-saving benefits include:
- health insurance
- food assistance
- low-cost gas and electric utilities
- low-cost phone service
- low-cost auto insurance
- unclaimed funds
4. Deduct those job search expenses
Being able to deduct job search expenses is one of the best perks available to unemployed taxpayers who qualify. These deductions are available for the 2017 tax year and earlier but are no longer available beginning in 2018.
Here’s some of what you can deduct through 2017:
- resume preparation costs
- travel expenses related to a job search (out-of-town interviews or career fairs)
- postage, express delivery or other mailing fees
- employment and outplacement agency fees
To qualify, you need to:
- Itemize your deductions. People taking the Standard Deduction aren't eligible.
- Be searching for a job in the same field. If you decide to become an actor after working as a chemist all your life, those audition expenses aren’t deductible.
- If you’re a first-time job seeker—say, right out of college—you can’t take job search deductions.
TurboTax Tip:
Being suddenly unemployed can make you eligible for certain tax deductions and credits that can help out when it comes time to file your taxes.
5. Give yourself a tax break
Depending on your income level, losing your job may open the door to some additional tax breaks, like the following:
- Earned Income Tax Credit. The amount of the credit increases the more children you have. A taxpayer with three or more qualifying children is eligible for a maximum credit of $7,830 in 2024, up from $7,430 in 2023.
- Child Tax Credit. A 2024 tax credit of up to $2,000 for qualifying children under the age of 17. For 2021 this amount is increased up to $3,600 per child depending on age and your 17-year-old children are eligible. For updates and more information, please visit our 2021 Child Tax Credit blog post.
- Child and Dependent Care Credit. Amounts you pay someone to care for your child so you can work or look for work may be deductible, depending on your level of income.
- Savers Credit. Credit of up to $1,000 ($2,000 for couples) for retirement plan contributions by low-income taxpayers. To be eligible in 2024, couples filing as Married Filing Jointly can't have income over $76,500 and Single filing taxpayers over $38,250. These income amounts are up from $73,000 and $36,500, respectively, in 2023.
6. Remember your job termination income is fully taxable
If you received severance pay, including payment for unused vacation or sick days, those amounts are fully taxable to you in the year that you receive them. Those amounts will be included on the W-2 form you receive from your former employer.
7. Pay taxes on unemployment compensation
You report the full amount of any unemployment compensation you receive (For tax year 2020, the first $10,200 of unemployment income are tax free for taxpayers with an AGI of less than $150,000). Early in the year, you should receive a copy of Form 1099-G from your state telling you how much unemployment compensation you received during the previous year so you can report it on your tax return.
8. Learn about self-employment taxes
If you’re unexpectedly unemployed, you may find yourself suddenly self-employed. You’ll need to learn a new set of tax rules.
But don’t worry—for most, there are just a few extra steps.
- Report your expenses on Schedule C (Profit or Loss from Business) or Schedule F (from Farm Income).
- Even if you just picked up a few odd jobs, you’ll still need to attach Form SE (Self-Employment Tax) to your 1040 and pay Social Security and Medicare taxes on your self-employment income.
- Check out IRS Publication 334, Tax Guide for Small Business, for tips on record keeping, estimated tax payments and business expenses you can deduct.
9. Take the Health Coverage Tax Credit (HCTC)
The Health Coverage Tax Credit (HCTC) is available through 2021 for a select group of unemployed people. If you lost your job due to trade with foreign countries and are receiving Trade Adjustment Assistance benefits, you may be able to claim this credit, which covers 72.5% of your health insurance premiums.
10. Take advantage of these tax breaks using TurboTax
If you lost your job during the past year, TurboTax can help you make sure you get the deductions and credits you deserve. We’ll ask simple questions about your situation and guide you to the credits and deductions that will put the most money back in your pocket.
TurboTax is here to help with our Unemployment Benefits Center. Learn more about unemployment benefits, insurance, eligibility and get your tax and financial questions answered.
