For those new to the unemployment line, or even those who have become familiar visitors, tax time may seem less important than in years when there were significant digits on your W-2s.
However, the IRS requires filing in order to receive any refund of withholding taxes. If you became self-employed to pick up some extra cash while seeking permanent employment, you are required to file if you made more than $400.
In addition, some unemployed individuals may find themselves eligible to receive tax credits that are refundable regardless of withholding or tax liability. In order to receive any refund money, you must file a return.
Here are just a few tax issues the unemployed need to take into consideration for 2010 Federal income tax returns:
Withholding on unemployment checks is voluntary; unfortunately, taxes are not. Unemployment compensation is subject to federal income tax. While the first $2,400 of unemployment earnings was not taxable in 2009 under The American Recovery and Investment Act of 2009, this exemption is not available for 2010 earnings. You must report all earnings. You should receive a 1099-G with the appropriate figure.
If you withdrew money from tax-deferred retirement accounts (401(k)s or Individual Retirement Accounts) to help weather the unemployment storm, you will most likely owe income tax on that money. The only exemption is if you were able to return those funds to another tax-deferred retirement account within 60 days. In addition, funds not redeposited may be subject to a 10% early withdrawal penalty, payable on your individual income tax return, if you were younger than 59 ½ years old at the time of disbursement.
Job Search Expenditures
If you itemize your deductions, keep track of your job search expenditures. Many are most likely tax deductible. Allowed deductions include cost of a head hunter or job search service, printing a resume or business cards, and postage for mailing resumes. Mileage to job interviews and the unemployment office may also be deductible if you itemize.
Earned Income Credit
Those who have pulled down substantial paychecks for years may not be familiar with the Earned Income Tax Credit, designed to encourage lower income earners to keep working. Depending on how many qualifying dependents a taxpayer is allowed to claim, this credit rides a sliding scale. As a fully refundable credit, filers can recover this money even if they have no tax liability.
Even if you had no earned income in 2010, you may need to file an individual tax return if you sold your home, stock, or other assets in 2010 and recognized a capital gain on the sale.
Forgiveness of Debt
In these tough economic times many creditors are negotiating reduced balance payoffs for debtors. Be aware that in many cases forgiveness of debt triggers tax consequences of the cancelled amount. There are numerous exclusions, including bankruptcy filing, so check IRS Publication 4681 for all the rules and regulations.
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