The following article was recently published by the MSCPA.
If you find yourself out of work, taxes may be the last thing you want to think about, but it’s important to continue your tax and other financial planning, even when you’re unemployed. The Massachusetts Society of CPAs offers practical tips that will help you address tax concerns during your job hunt.
Tip #1: Your Unemployment Income Is Taxable
Did you know that unemployment benefits are subject to both federal and, depending on where you live, state taxes? That’s an important fact to keep in mind so that you stay within your budget and aren’t surprised by a larger-than-expected tax bill in April. You must report and pay taxes on any kind of unemployment income, including both state and federally funded benefits. If you request it, the federal government will withhold 10% of your unemployment income toward your taxes. This is worth considering, since it will help prevent you from spending money that should be set aside for taxes. It will also allow you to avoid the paperwork involved in determining and paying quarterly estimated taxes on your unemployment income.
Tip #2: 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, depending on your gross income, filing status, and age. 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 actually be due a refund due to your subsequent drop in income.
Tip #3: 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 available in 22 states, the District of Columbia, New York City, and Montgomery County, Maryland), which can lower your taxes or even provide a refund, depending on your income level and the number of children you have. Other credits that may reduce your federal tax outlay include the Child Tax Credit and the Child and Dependent Care Credit. Your CPA can offer advice on the tax and other benefits that can improve your financial outlook while you’re looking for work.
Tip #4: 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. Moving expenses may also qualify if your move is closely related to the start of your work and you meet the distance and time requirements.
Tip #5: Learn about Self-Employment Taxation
There’s good and bad tax news for people who begin consulting or set up their own business when they find themselves out of work. 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 the business use of your car. But, since you won’t have an employer withholding taxes for you, 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.
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. Turn to him or her with all your financial concerns. If you’re looking for a CPA you can trust, please give us a call at (508) 830-0007.