Irving CPA explains tax deductions for the unemployed in 2008 and 2009

If you were unemployed in 2008, or are facing unemployment in 2009, DL Long, Certified Public Accountant, PC in Irving, Texas can advise you on the tax deductions you are now eligible for, as well as guide you on how to properly handle retirement accounts to minimize taxes and avoid penalties. 

Unemployment produces anxiety and confusion for many individuals, and coping with the loss of income while facing questions about the tax implications that result can be daunting.

If you were unemployed in 2008, you might be wondering about the tax implications of benefits you received, such as severance and vacation pay, and whether additional income such as unemployment compensation or money from freelance work is taxable. Knowing what income is taxable and what isn’t, and what deductions you might be eligible for, will help you plan for and reduce your tax burden when you file. Tax law changes in 2009 will help ease the burden for many who find themselves out of work this year.

Severance pay
Severance pay is taxable in the year that you receive it; the amount will be included on your W-2. In addition, payments for any accumulated vacation or sick time are also taxable.

The IRS requires anyone who received a W-2 from their employer and made at least $8,950 (if you're single and less than 65 years old) or made at least $400, if they’re self employed, to file a tax return. If you expect to receive a tax refund, you must file--even if you didn't work at all.

Unemployment compensation
Unemployment compensation is also taxable on most federal and state tax returns. Be aware that Federal income tax is not automatically withheld. When filing for unemployment, you can opt to have federal taxes withheld by completing a W-4V. A flat 10 percent withholding rate will apply.

To help ease the burden for the many Americans who are finding themselves out of work in 2009, the recently enacted American Recovery and Reinvestment Act will allow all or part of unemployment benefits received in 2009 to be tax free.

Under this act, every individual who receives unemployment benefits during 2009 can exclude the first $2,400 of these benefits when they file their tax return next year. For a married couple, the amount is $4800, because the exclusion applies to each spouse separately. Again, Federal income tax is not automatically withheld from the portion over $2400 each individual receives. To ensure that you aren’t surprised by an unexpected tax bill on this money, you can opt to have Federal income tax withheld when you apply for benefits. 

Money taken from a 401K
If you took money out of a retirement plan or 401K as supplemental income, it counts as income and is taxable too. If you are considering taking money from a 401K in 2009, be aware that if you are under 59 and one half years old, you will incur a penalty in addition to taxes on the money you withdraw. 

Supplemental work
Supplemental work you perform while unemployed (such as odd jobs or freelance work) is taxable income. To report that income, you must include a Schedule C with your income tax return, which details the income and expenses for the year.  If you make more than $600 on an odd job or freelance work, you will be issued a 1099 form from the employer; however, if you make less than $600, be aware that you won’t receive a 1099 but will still be responsible for reporting the amount you earned as taxable income.

Relocation expenses
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. However, this rule only applies to a job location that’s 50 miles further than the old residence was from the old job.

Money spent on job searches
You might be able to deduct some expenses incurred while looking for a new job. For instance, you might be able to deduct employment and outplacement agency fees, resume preparation fees, and travel expenses related to interviews, which can be a considerable savings. Between Jan. 1, 2008 and June 30, 2008, you can claim 50.5 cents per mile; between July 1, 2008 and Dec. 31, 2008, you can claim 58.5 cents per mile. Long distance calls or cell phone charges used with your job hunt are also deductible.

Expenses that are not deductible include clothing and accessories, such as briefcases, that you purchase for interviews. Remember to keep all of your receipts to validate your claims. And, if you find yourself in doubt about whether an expense is deductible, keep the receipt and consult a professional tax preparer when you file.

The IRS offers extensive information about these and other issues in its online publication “Tax Impact of Job Loss” available at http://www.irs.gov/pub/irs-pdf/p4128.pdf.

DL Long, Certified Public Accountant, PC can help you take advantage of all the tax deductions available to you if you have lost your job, as well as advise you on federal programs designed to help ease your tax burden.  Our extensive knowledge of the tax implications related to income you receive as a result of a job loss and the proper transition of retirement accounts can help ensure that you aren’t faced with unexpected penalties at the end of the year.