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.
- 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 income exceeds $10,000 (single filer under age 65) or $20,000 (joint filer under age 65).
- 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 sizeable refund at tax time.
- Make use of tax-free state benefits. For those who receive food stamps or state public assistance, they are not taxed by the IRS. But check your state’s eligibility requirements. Not all unemployed people qualify.
- Deduct those job search expenses. This is one of the best perks available to unemployed taxpayers who qualify. Here’s some of what you can deduct:
- 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 must meet these requirements:
- Itemize your deductions. People taking the standard deduction are not 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.
- Give yourself a tax break. Depending on your income level, losing your job may open the door to some additional tax breaks. (Check the instructions for Form 1040 for details and to find out if you meet the eligibility requirements. Or prepare your taxes with TurboTax, and we’ll tell you which credits you’re eligible to claim and which ones give you the biggest tax benefit.)
- 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 $6,143 in 2014.
- Child Tax Credit. A tax credit of up to $1,000 for qualifying children under the age of 17.
- 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 2014 married couples can’t have income over $60,000 and single taxpayers over $30,000.
- 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 2014. Those amounts will be included on the W-2 form you receive from your former employer.
- Pay taxes on unemployment compensation. You must pay taxes on the full amount of any unemployment compensation you receive. Early in the year you’ll 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.
- 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) and don’t forget to pay your Social Security and Medicare taxes.
- Even if you just picked up a few odd jobs, you’ll still need to attach Form SE (Self-Employment Tax) to your 1040.
- Check out IRS Publication 334, Tax Guide for Small Business, for tips on record keeping, estimated tax payments and business expenses you can deduct.
- Take the Health Coverage Tax Credit (HCTC). The HCTC is available 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 claim this credit, which covers 80 percent of your health insurance premiums.
Find out more at the HCTC Program home page at www.irs.gov.