We reported last week that the IRS would be relaxing certain restrictions for those taxpayers hurt by the recession. CNNMoney ran an article, though, that reminds us all that, despite the economy, you probably aren’t out of the woods just yet. Here is some of their tax advice:
Do I still have to pay tax if I was out of work in 2008?
Probably. The IRS requires anyone who received a W2 from their employer and made at least $8,950 (if you’re single and under 65 years old), or made at least $400 if you’re self employed, to file a tax return. If you’re anticipating a tax refund, you must file – even if you didn’t work at all.
But whether you will have a tax liability depends on a variety of factors, Steber said. “Every tax situation is unique, based on the facts and circumstances of the taxpayer.”
For example, if you only had unemployment compensation throughout the year, you may owe some tax on the checks you received. A severance package could also give you a tax bill, as could dividends and interest from investment income.
Other factors that weigh in include your tax deductions and other life changes associated with unemployment, like if you downsized your house or picked up supplemental income, Steber said.
Do I have to pay tax on my unemployment checks?
Yes. Unemployment compensation is taxable on federal and most state tax returns.
When applying for unemployment, you can choose whether you want federal and/or state income taxes automatically taken out of your unemployment benefits. If you choose to withhold, federal income taxes are withheld at a 10% rate, while the state rate varies. But since many cash-strapped Americans opt not to withhold – come April they may have to pay up.
So unless you previously elected to have taxes withheld throughout the year from your unemployment checks, a tax bill may be an unwelcome surprise when you file your 2008 return.
What if I took money from my 401(k)?
You may owe taxes if you took money out of a retirement plan or 401(k) to supplement your unemployment checks. That counts as income and is taxable too, said Joseph Perry, the partner in charge of Marcum & Kliegman’s tax department. And that might not be all you owe. The taxes are in addition to a 10% penalty on early withdrawals if you’re below the age of 59-1/2, he cautioned.
What if I did some supplemental work?
Freelance and project work can be a lifeline for unemployed workers between jobs. “Unemployed tend to become self-employed, that’s a natural outgrowth of being unemployed,” Steber said.
But if you picked up odd jobs or offered consulting services while unemployed, you’re subject to income tax and self-employment tax on that income.
To report that supplemental work, taxpayers must include a Schedule C with their income tax return, which details the income and expenses for the year.
If you continued a project for your old employer or freelanced for someone else, and made more than $600, you will be issued a 1099 and must include that in your income tax return as well. (If you made less than $600, then you will not be issued a 1099 but are still responsible for reporting anything you made as taxable income.)
What if I had to relocate for a job?
If you accepted a new job that required relocating, you may also be able to deduct the moving expenses not reimbursed by your new employer. But there’s a catch, the new job site has to be 50 miles further than the old residence was from the old job, according to Tom Ochsenschlager, vice president of taxation for the American Institute of Certified Public Accountants, which basically prevents you from trying to deduct a move within the same metropolitan area.
What if I spent a lot of money on job searches?
Those who were on the job hunt last year may get a gift from Uncle Sam: a slew of tax deductions. In fact, many of the expenses incurred while looking for a job can be deducted, which can result in some serious savings.
By declaring the following itemized deductions, taxpayers may lower the amount of taxable income they have for the year.
For starters, anything you spend on creating, printing and mailing your resume is deductible, as is anything you spend on a career coach or headhunter. Also included are long distance or cell phone charges directly associated with your job search.
Transportation costs such as a bus, taxi, train or plane to an interview is deductible, as is the mileage costs accrued when you drive to interviews and even to the unemployment office. (Between Jan. 1, 2008, and June 30, 2008, taxpayers can claim 50.5 cents per mile, between July 1, 2008 and Dec. 31, 2008, taxpayers can claim 58.5 cents per mile.) That also goes for parking and tolls and meals and lodging if the interview was out of town.
But the buck stops there. You cannot, unfortunately, deduct the value of your time or the cost of a new interview suit, briefcase or new shoes for pounding the pavement.
Of course, taxpayers should keep receipts related to any of these expenses in order to substantiate them when filing and experts recommend consulting a professional tax preparer for help.