All or part of unemployment benefits received in 2009 will be tax free for many unemployed workers, according to the Internal Revenue Service.
“This morning we learned that a record 5.6 million people were receiving unemployment benefits in the middle of March. This underscores the need for the relief provided by the American Recovery and Reinvestment Act, which includes making the first $2,400 of unemployment insurance exempt from tax,” said IRS Commissioner Doug Shulman. “I urge all unemployed workers to take this special tax break into account as they plan their tax withholding and quarterly estimated tax payments for the year. This change offers a helping hand to millions of Americans who are out of work and struggling to make ends meet.”
Under the American Recovery and Reinvestment Act, enacted last month, every person who receives unemployment benefits during 2009 is eligible to exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the exclusion applies to each spouse, separately. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits they receive.
The new law doesn’t affect the return taxpayers are filling out now. Unemployment benefits received in 2008 and prior years remain fully taxable.
Unemployed workers can choose to have income tax withheld from their unemployment benefit payments. Withholding on these payments is voluntary. However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year. Those who choose this option will have a flat 10 percent tax withheld from their benefits.
Unemployed workers who expect to receive more than $2,400 in benefits this year should consider having tax withheld from their benefit payments in excess of that amount. Those unemployed workers who have already chosen to have tax taken out of their benefits, should consider the $2,400 exclusion in determining whether to continue to have tax withheld.
Use Form W-4V, Voluntary Withholding Request, or the equivalent form provided by the payer to request withholding to begin or end. Form W-4V is also available on IRS.gov or by calling the IRS toll-free at 1-800-TAX-FORM (829-3676).
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.
The unemployment rate ballooned in December to 7.2%, up from 6.8% in November and 5% in April, according to a government jobs report released today.
As the nations employers shed 524,000 jobs last month, more than 11 million Americans are now unemployed.
Last month’s unemployment rate was the highest since January 1993, when the economy was trying to recover from the 1990-91 recession. The lost in total jobs for 2008 was the largest since 1945.
“These numbers, back to back, of more than a half million a month suggest that the U.S. economy is in a freefall,” said Nariman Behravesh, chief economist at IHS Global Insight, to The New York Times. “It’s scary, and it indicates that unless something is done and done quickly to turn this economy around, we’re looking at an awful situation this year.”
The toll of job losses cut across every sector. Nearly 800,000 manufacturing jobs were lost in 2008, and 630,000 construction jobs disappeared as home-building slowed. Jobs dried up in the financial sector, in publishing houses and trucking companies, department stores and hotels.
“This is unprecedented,” said Mark Zandi, chief economist of Moody’s Economy.com. “It’s coast to coast. It’s everywhere. There’s really no refuge in this job market. There’s no safe place.”
“Even with a stimulus package, the unemployment rate is going to keep rising and by December it is likely to be over 9 percent,” said David A. Levy, chairman of the Jerome Levy Forecasting Center. In a speech on the economy, Mr. Obama said Thursday that the unemployment rate “could reach double digits.”
The accelerating job loss — more than one million jobs have disappeared in just two months — suggests that the recession will last at least into early summer, making it the longest since the 1930s. The severe recessions of the mid-1970s and early 1980s each lasted 16 months, the current record.
But remember, it’s all in how you look at it. 236.com, for example, makes a comforting observation: 92.8% of us are NOT seeking unemployment benefits.