If you recently lost your job, filing for unemployment benefits is one of the first things you will need to do. Receiving unemployment benefits can help you to get by financially as you search for new employment. However, there are tax consequences related to unemployment benefits. You need to know what you will pay in taxes for the unemployment benefits you receive to make sure you can afford to pay your taxes.
The employment benefits you receive are taxable once you’ve received more than a set amount. These benefits are not subject to Social Security or Medicare taxes. Depending upon which state you reside in, your taxes will be exempt from state taxes. The best option is to have at least 10 percent of your unemployment check withheld for federal taxes. If you do not have the money withheld, you could end up paying an even higher amount of money due to assessed penalties and/or interest.
If you receive severance pay, you will need to pay federal and state taxes. For individuals that receive a lump-sum severance payment, the tax is withheld at a flat rate. It is important to find out what the tax rates are in your state to understand if you will owe less or more when you file taxes. Certain tax breaks can cut into the taxes you need to pay or will receive back as you may be unable to itemize deductions.
Some people choose to withdraw money from their 401k or IRA plans during unemployment. If you take money out of a former employer’s 401k and you did not roll the proceeds into an IRA within a set amount of time, the money is added to your income for taxation purposes. This will require you to pay federal and state income taxes on it. The money you withdraw from the retirement account could cost you 10 percent in tax penalties, so use caution when exercising this option.
You will receive a form 1099G for tax reasons. You will need to fill out a form 940 when filing taxes. It is important to work with a tax professional if you are not sure how to correctly fill out the forms you are given.
One of the most important things you can do to help save money on taxes during a period of unemployment is to deduct your job search expenses. Resume preparation costs, travel expenses related to job searching, and cost for employment agencies are all tax deductible. Only taking the standard deduction will prevent you from claiming these costs on your taxes. Meet with an experienced R&G Brenner tax professional to help you determine what you can deduct. Understanding which tax breaks you are eligible for will allow you to have the money you need to help with your job search instead of having to worry about paying taxes.
Unemployment affects your taxes in a whole variety of ways. If you are currently or recently unemployed, make sure you know what changes you’ll need to make to your taxes this year.