Complete Guide to Filing Taxes When You’re Unemployed

Most people have been there at one point or another.

You can call it whatever you want: funemployed, underemployed, or unemployed. The truth is that unemployment, and even simply falling short of a livable wage, is very common in the United States. Even when the unemployment rate is as low as it is, that still means that tens of millions of Americans are unemployed at any given time.

While we often talk about unemployment on a national level, putting it in terms of the economy or political agendas, there’s a far more personal definition that most will experience.

Unemployment can be stressful, disappoint, overwhelming, and a host of other things that can leave you feeling low. And on top of all the emotional impacts unemployment brings is the very real financial toll it takes on the unemployed.

While of course your income may be impacted, unemployment can hurt your credit score, cause you to fall behind on bills, take out loans, and require you to apply for unemployment benefits.

Even if you’ve only been unemployed for a short period of time, the impacts unemployment brings can linger for a while—and may rear their ugly heads again long after you’ve been unemployed. For example, once it’s finally time to file taxes.

Do you know how to file taxes when you’re unemployed?

Chances are no. No, you don’t.

But that’s okay! We’re here to help walk you through the basics. Unemployment can be intimidating and upsetting, but you don’t have to go it alone. We’re here to help guide you through the basics at tax time and make sure you’re confident enough to get the maximum tax benefit.

Are unemployment benefits taxable?

This is a huge question for people filing their taxes while unemployed, and it’s a very good question at that. While we wish we could tell you that unemployment benefits are completely untaxed, that just isn’t true. However, depending on the state you live in, you may be pleasantly surprised at your reduced tax burden.

The headline here is going to be pretty straightforward: Unemployment benefits are taxed federally. Depending on your state, things get more complicated (in your favor).

Typically, state unemployment benefits are not taxed, but let’s dive into an example here. In California, your state unemployment benefits are not taxable on your California tax return, but they are on your federal tax return. Fortunately, your biweekly unemployment forms on which you certify your work search history have a box which you can check to withhold ten percent for your federal taxes, which will ease your tax burden later on.

Of course, this is just one example from one state. However, several states give you the option to withhold your federal income tax should you choose to. And while you’ll still owe state and federal taxes on your unemployment compensation—depending on the state—you don’t need to freak out. Most states understand the hardship the unemployed are dealing with, and they make sure to find ways to ease the tax burden.

Can you get access to special tax credits when you’re unemployed?

We won’t bury the lede here. Yes! You absolutely can gain access to special tax credits when you’re unemployed. Here’s what may or may not count.

First of all, it’s worth investigating your eligibility for the earned income tax credit, or EITC. The EITC is specifically designed for workers who don’t make all that much money, and your unemployment benefits won’t count.

What will count, of course, is your other income for the year—so if you worked from January to October, your chances of qualifying for the EITC are slim. Conversely, if you’re filing for two (also known as “married and filing jointly,” even if your spouse is working, your reduced combined income could make you eligible.

In other cases, you can receive benefits if your unemployment and lack of income impact your finances in other ways. For example, just take a look at your IRA and 401 (k). If you have a retirement account, you’re typically forced to pay a 10 percent penalty if you withdraw any funds from that account early. However, if you’re withdrawing funds to pay for medical expenses totaling over 10 percent of your income, you may be able to waive the penalty.

What if I earned income from another job the same year I was unemployed?

Sadly, you’re still on the hook for all the regular income you’ve earned throughout the year when you weren’t employed. Of course, this shouldn’t come as a surprise, as your normal income is taxed normally—and therefore doesn’t really affect any of your unemployment benefits.

However, if you were unemployed at the beginning of the year, any of your expenses dedicated specifically to seeking out a new job or starting a new business may be deductible. Pretty good news, right?

Let’s say you’re on the hunt for a new job. If you’re paying job-related expenses, such as getting your resume revamped or traveling for a job interview, you can deduct that expense. However, you need to itemize your expenses. Because everything in your work search is a miscellaneous deduction, you need to list them individually—and they must total more than 2 percent of your adjusted gross income. Oh, and they won’t count if they aren’t in your field. So that $400 trip to Reno won’t help your taxes unless you had a job interview there for a sales position—assuming you used to work in sales.

On the other hand, if you’re starting a business this year and rack up some startup costs, they’re probably deductible! They may be auto expenses if you’re driving your car from investor meeting to investor meeting, or they may be as simple as buying printer paper. The IRS will allow you to deduct part of your rent and utilities if you’re dedicating them to a home office, too!

If you’ve ended your unemployment by starting a business, kudos to you—you can probably see quite a few deductions on your taxes. Just make sure you keep the receipts.

File Your Taxes with Confidence

Funemployment is rarely that fun. However, if you know what you’re doing, it doesn’t have to be a drag when it comes to filing your taxes. By learning the basics to filing taxes when you’re unemployed, you can figure out exactly how to capitalize on this rough patch and get the most out of your situation when it’s time to report and file your tax return.

We know it’s not easy to be where you are. Whether that employment dry spell ends tomorrow or in two months, we support you—and with these tips, we know Uncle Sam will, too!

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