10 Ways for the Suddenly Unemployed to Save on Taxes
Losing your job unexpectedly may get you some help on your income taxes.
A lot of people are out of work these days. With the unemployment rate in the U.S. at 8-10%, many Americans are facing a drop in income. If you lost your job suddenly, your tax status may have changed and you might be able to claim some credits to help you out.
There are several credits and deductions that can help you save on your taxes while you are unemployed that are only available to lower income taxpayers. You may, however, also have income that you have to pay taxes on that others don’t. So here are 10 ways that you can take control and save some money while you get back on your feet.
1. Don’t just stop filing: You’d think that one is a given, but without a job and a W-2 coming in the mail once a year, a lot of people forget to file their tax returns. If you worked until the middle of the last tax year and you earned more than $9,350 (single, under 65) or $18,700 (married, filing jointly, under 65) you are required to file an income tax return.
2. Stay ahead of the game: The earlier you file your tax return, the quicker you’ll get your refund. If you lost your job, you may have moved into a lower tax bracket. Your former employer may have withheld too much and you may have a decent sized refund coming your way.
3. Let the state help you out: There are several tax-free state benefits like food stamps and public assistance. If you qualify for these benefits (not all unemployed people do), you won’t be taxed by the IRS.
4. Look for a new job: Did you know that expenses related to your job search can be deducted? Unemployed taxpayers who qualify can deduct resume preparation costs, job-related travel expenses (driving out of town to a career fair or interview), postage and other delivery and mailing costs, employment agency fees, etc. In order to qualify, you first have to itemize your deductions. If you take the standard deduction, you will not qualify. You must also be searching for employment in the same field as your last job. So you can’t go from being a computer technician to being a bartender and deduct your new bartending license. First-time job seekers are not eligible. So if you just graduated from high school or college, you can’t claim these deductions.
5. COBRA insurance: COBRA provides an insurance plan subsidy for anyone who became unemployed between September 1, 2008 and May 31, 2016. Qualified taxpayers are only required to pay 35% of their COBRA insurance premiums. If your income does not exceed $145,000 (single) or $290,000 (married, filing jointly) you are eligible for this benefit for up to 15 months after losing your job. You will automatically get this subsidy plan if you qualify for COBRA during those 15 months and your employer will automatically be credited by the IRS.
6. Credits for low income taxpayers: Losing your job may put you in a lower tax bracket and could make you eligible for some tax breaks that you didn’t have access to before. You can find more details on how to qualify on Form 1040. TurboTax will also show you credits available to you as you go through the filing process. A few of the credits you may qualify for are:
• Earned Income Tax Credit: based on how many children you have, up to a maximum of $5,666 for three or more children
• Child Tax Credit: up to $1,000 for qualifying children up to age 17
• Child and Dependent Care Credit: depending on your income, you can offset the amount you pay for childcare during your work hours
• Savers Credit: up to $1,000 (single) or $2,000 (married, filing jointly) for retirement plan contributions by taxpayers who earn less than $27,250 (single) or $55,500 (married, filing jointly)
7. Termination pay is not tax-free: Severance pay, payouts on remaining sick days or vacation days and any other job termination income you earned are considered taxable income and will be included on your W-2.
8. Unemployment benefits are also not tax-free: Last year, unemployed tax payers were allowed to collect the first $2,400 in unemployment income without paying taxes. That exemption is no longer in effect and you are required to pay taxes on all of your unemployment income from 2016. Your state should have sent you a Form 1099-G at the beginning of 2016 showing you all of the unemployment income you earned so you can enter it on your Form 1040.
9. Be your own boss, but be smart: You may decide that losing your job is just what you needed to finally start your own business. If you decide to go the self-employed route, you need to make sure to read up on the tax rules. They aren’t that much different, but there are a few things you should know. You will be required to report your expenses by filing Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farm Income). You are also responsible for calculating and paying your social security and Medicare taxes yourself, since your employer isn’t deducting them for you anymore. If you did any little jobs for cash, you will need to file Form SE (Self-Employment Tax) and include it with your 1040. If you want more information on how to file self-employment taxes, have a look at IRS Publication 334 (Tax Guide for Small Business).
10. Health Coverage Tax Credit (HCTC): Only a small group of unemployed people are qualified for this credit. People who lost their jobs because of trade with foreign countries and who are receiving Trade Adjustment Assistance benefits are eligible to claim this credit. If you qualify, the credit will cover 80% of your health care premiums. To find out more about the HCTC go to the IRS website at http://www.irs.gov.
Uncle Sam Cares
The IRS understands that in this economic climate, people are getting hit hard financially and they are trying to help so you can get back out there into the workforce. If you want more details on how to save more on your taxes while you’re unemployed, check out IRS Publication 4128 (Tax Impact of Job Loss).
Help is Out There
Online tax software is a great way to make sure you don’t miss any important tax breaks. TurboTax walks you through filing step by step and asks questions along the way to determine your eligibility for any credits and deductions that will save you money this year.