CHICAGO, IL--(Marketwired - February 27, 2014) - When you're unemployed taxes may be the last thing you want to think about, but it's important to continue your tax and other financial planning, even while you're looking for work. The Illinois CPA Society suggests these practical tips that will help address tax concerns for individuals seeking employment.
Your Unemployment Income Is Taxable
Did you know that unemployment benefits are subject to both federal and, depending on where you live, state taxes? You must report and pay taxes on any kind of unemployment income, including both state and federally funded benefits. You can have Federal and state income taxes withheld from your unemployment check. This is worth considering, since it will help prevent you from spending money that should be set aside for taxes. Otherwise, you will be paying quarterly estimated taxes on your unemployment income to avoid underpayment penalties.
Don't Forget to File a Tax Return
Filing your tax return may seem unnecessary if you aren't earning income, but it's still likely required. Keep in mind that any severance benefit or vacation or sick pay you received when you were laid off will be included in your taxable income. On the upside, if you worked for part of the year and had taxes withheld or paid estimated taxes while employed, you may get a refund due to your subsequent drop in income.
You May Be Eligible for Tax Benefits and Credits
A lower income may help you qualify for a variety of programs, including the federal Earned Income Tax Credit (and similar state and local credits), that can lower your taxes or even provide a refund. Other credits that may reduce your federal tax outlay include the Child Tax Credit and the Child and Dependent Care Credit. Check to see if you qualify.
Keep Receipts for Costs Related to Your Job Search
Travel expenses for a job interview, the costs of résumé preparation and mailing and outplacement agency fees are just some of the expenses you may be able to deduct if you itemize. Moving expenses may also qualify if your move is related to the start of your new job and you meet the distance and time requirements.
Learn about Self-Employment Taxation
You should be able to deduct many of the ordinary and necessary expenses related to starting up and running a new business, including costs associated with a home office or transportation. You will have to make quarterly estimated tax payments on your self-employment income. That will include paying the full cost of self-employment taxes as well as income taxes.
Are You Going Back to School
If you are going back to school to upgrade your qualifications or start a new career path, you may qualify for educational credits -- some of these credits are "refundable" -- meaning that you may get additional money back on your return.
Be Careful when Dipping into Retirement Plans
It is understandable that a taxpayer that is out of work will see the balance in their retirement plan as an easy source of cash. There are two ways to withdraw money, and both should be approached with caution. The first is a withdrawal. A withdrawal doesn't need repaid, but is taxable and if the taxpayer is under 59 ½ the person is subject to a 10% withdrawal penalty from a traditional IRA (or 55 years old from a 401(k) account).
The second way to take money from your account is a loan. Taking a loan is different from a withdrawal for tax purposes as it is not immediately taxable income and must be repaid to the account with interest. If the loan is not repaid, it will be deemed a taxable transaction.
Your Local CPA Can Help
Loss of a job is a tough blow, but there are many steps you can take to maintain a sound financial footing as you search for new employment. Your local CPA can offer advice on revising your budget, cutting expenses and dealing with tax and other financial issues. To find a CPA in Illinois with the unique qualifications and expertise to guide you through tax season visit the Illinois CPA Society's free "Find a CPA" directory at www.ICPAS.org.
About the Illinois CPA Society
The Illinois CPA Society, founded in 1903, is the fifth largest state CPA Society in the nation, with more than 23,000 members. It is the premier professional organization that represents CPAs in Illinois. For more than a century the Society has advanced the highest ethical and financial standards of the profession, and remains a leader in educating the public on financial issues. The Money Management columns are a joint effort of the AICPA and the Illinois CPA Society, as part of the profession's nationwide 360 Degrees of Financial Literacy program.