Tax Tips for the Unemployed

Tax Tips

At the end of 2010, 14.5 million people were unemployed; many more were out of work at one time or another throughout the year. As you start preparing your 2010 tax returns, here are a few things to keep in mind:

Unemployment benefits are taxable

In 2009, an exemption was given for the first $2,400 of unemployment benefits received. That break has expired for tax year 2010 so you’re going to need to budget accordingly (Form 1099-G will tell you how much unemployment you must report.). Also keep in mind that severance pay and accumulated sick leave or sick time are taxable as well.

Tapping retirement accounts early is costly

One of the first things people do when they’re out of work and need money is tap their retirement accounts. Raid the IRA, and with very few exceptions, you’ll be subject to a 10% early withdrawal penalty (if you are under the age of 59 1/2); 401(k) plans are subject to similar rules.

Job hunting expenses are tax deductible

Assuming you looked for a position in the same line of work in 2010, you can deduct all sorts of job-hunting costs — travel and transportation expenses to/from interviews, business cards, career counseling, the costs of preparing and copying your resume, and more. Granted, there are some caveats -expenses incurred by those seeking first-time employment are not deductible (sorry, recent grads!), you have to itemize, and all miscellaneous deductions must exceed 2% of your adjusted gross income – but you get this break even if the job search was unsuccessful.

Take credit(s!) where credit is due

Did you go back to school in 2010? Were you out of work much of the year? There are a number of tax credits that may apply to your situation. Among them: the American Opportunity credit (up to $2,500) for those who were working toward a degree in 2010; the Lifetime Learning credit (up to $2,000) for those who took classes last year to acquire or improve job skills; the Earned Income Tax Credit for low-to-moderate wage earners; and the lesser known Saver’s tax credit (up to $1,000). If you earned $27,750 or less ($55,500 for married filing jointly) and deposited money into an IRA 401(k) plan or other retirement program during the year, you may qualify for it.