Tax Tips for the Unemployed
Tax Tips for the Unemployed
For many, it’s been a pretty difficult year. As we rang in the new decade, who could’ve imagined all the challenges that 2020 would bring. People with seemingly stable jobs felt the rug pulled out from under them as the country (and the world) dealt with the COVID-19 pandemic.
It’s a truly unprecedented time. Unemployment rates soared to over 14% as much of the country went into lockdown, according to the Bureau of Labor Statistics. Even today, unemployment rates are over 8%—double that which they were over the last few years.
Sadly, many people found themselves unemployed with very few options to find new work. They relied on unemployment benefits and a stimulus check to meet their basic needs.
Sound familiar? If so, then there’s some important things you need to know. You may be struggling right now. Unfortunately, things may actually get a lot more difficult when tax time comes around next year.
Unemployment Benefits Are Taxable
This may come as a shock, but it’s true. The help you’re receiving from the state and federal government during this difficult time is taxable income. In fact, the government will send you a Form 1099-G a couple of months before taxes are due. You must list the money you earned from your unemployment benefits on your 1040 income tax form.
It goes without saying: You don’t need to get hit with a big tax bill come next April. That’s likely the last thing you need. To prevent this, you can ask to have taxes withheld from each unemployment check you receive.
Complete Form W-4V (Voluntary Withholding Request) and send it to the office that issues your unemployment benefits. The government will then withhold a percentage of each unemployment check.
This is something you should strongly consider. Yes, times are tight, but the 10% taken out of each unemployment check could be much less of a burden than a lump sum tax payment due at the beginning of next year…and who knows what challenges lie ahead of us?
More Tax Tips for the Unemployed
During this difficult time, you want to make sure tax laws work in YOUR favor. Here are a few more tips you need to know while you’re between jobs.
File Your Tax Return
You spent most of the year out of work. Filing a tax return may be one of the last things on your mind. But, yes, you still need to file an income tax return come next April. If your annual income (with unemployment benefits) is more than $12,200 for a single filer—or $24,400 for joint filers under 65—you must file your tax return.
This is a necessary step. Not filing your taxes could lead to even more expenses—including penalties and interest—which quickly add up when you’re already struggling to make end’s meet.
Also, plan on filing your taxes early. Those who lost jobs—especially good paying ones—may move into a lower tax bracket. In fact, the withholdings from your former job may be too high for your current tax bracket. This means a better tax refund to assist with any mounting expenses.
Take Advantage of Government Benefits
You’ve worked hard all your life. You paid your dues. Accepting “handouts” may seem a little demeaning. If you’re unemployed and struggling to find new work, don’t feel too proud to take advantage of the programs designed exactly for people in your situation.
After all, the taxes you paid while working helped to fund these benefits. This includes:
- Access to affordable health insurance
- Food assistance programs
- Reduced cost gas, electricity, and phone services
Earned Income Tax Credit (EITC or EIC)
If your income took a major hit this year, you may be eligible for an Earned Income Tax Credit. If your earnings (not including unemployment benefits or pensions) are above $1 and less than $15,820, you can receive a tax credit of $538. Every little bit adds up.
If you have 3 or more children, the tax credit can be as high as $6,660 when you make under $50,954 (or $56,844 if you’re married and filing jointly).
A few other things to consider when filing for EITC:
- Your investment income must be less than $3,650 for the year.
- You can’t claim EITC if you are filing your taxes as married filing separately.
- You need to have your main home in the United States for more than half of the tax year.
- You must be between 25 and 65 at the end of the tax year.
The EITC can be extremely helpful (especially if you have qualifying children) when things get tight because you are out of work. You can learn more about the Earned Income Tax Credit at the United States IRS website.
Going Freelance? This is Taxable
Are you unemployed from your main source of income, but still doing some odd jobs and freelancing? Then, you’re self-employed. And, as you probably guessed, there is a special set of tax rules for the self-employed.
You need to file a Form SE (Self-Employment Tax) for any of the extra income you earned while freelancing and attach it to your 1040 return. This ensures you are paying the social security and medicare taxes for your self-employment income.
Good news: You can choose to report expenses related to your self-employment. These expenses will be deducted from your income earned. These need to be reported on a Schedule C (Profit or Loss from Business) form.
Some expenses that can be deducted include:
- Office supplies and equipment
- Advertising costs
- Bank fees
- Education expenses
- Subscriptions to trade or professional publications
- And more…
For more information, check out the IRS’s Tax Guide for Small Business (Publication 334).
Feeling Overwhelmed About Filing This Year’s Tax Returns?
Like many people, this year you’ve been through a lot of things you probably never experienced before. In the past, filing your tax returns was pretty straightforward. 2020 taxes…well, you may already be feeling the headache.
Of course you want to do things correctly to avoid penalties, interest, or even an audit. But where do you start?
Steven Lissner & Company will help make sure your tax deductions are maximized and all the confusion about your 2020 earnings (or lack of earnings) is sorted out. Applications like TurboTax may make filing a tax return easier and quicker…but can you afford to be missing out on extra money entitled to you?
Our certified public accounting experts know the tricks of the trade and deal with special circumstances like unemployment benefits all the time. We offer friendly, helpful accounting advice while ensuring that all your sensitive financial documents are kept safe.
Steven Lissner & Company has over three decades of experience and the knowledge to help you…whatever your current situation. To secure your biggest tax return yet, schedule a consultation today!