Losing job calls for new tax strategy
By Ryan J. Donmoyer
Bloomberg News Service
WASHINGTON As many as 22 million people who wound up in unemployment lines last year are learning they didn't leave the tax man behind when they lost their jobs.
"In the eyes of the IRS, income is income," said Barbara Moore, an attorney and unemployment law analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information. "Whether it comes from a paycheck or unemployment benefits has no bearing on your tax obligation."
Many Americans are dealing for the first time with unemployment compensation and the tax consequences of their new status.
People who were unemployed last year, especially those who lost high-paying jobs, should take a hard look at their tax situation before April 15, tax experts say. They may be able to claim deductions they haven't used in years, such as job-hunting costs, medical expenses and tuition credits. And losing a job can affect tax treatment of pension plans and flexible spending accounts.
Unemployment benefits have been subject to federal tax since 1986, and beneficiaries can opt to have taxes withheld. Benefits aren't subject to Social Security and Medicare payroll taxes.
Many people who were laid off will be due a refund because they'll be in a lower tax bracket and can claim more deductions, tax experts said.
"You get larger credits and larger deductions the lower your income is," said Steve Bankler, a San Antonio accountant.
For example, the unemployed have to pay their own health insurance premiums. Combined with their income drop, that could mean they are spending more than 7.5 percent of their income on medical expenses, above which point expenses can be deducted.
Formerly high-salaried workers may be surprised to learn they can claim deductions that their previous incomes made them ineligible for, such as the $600 child credit and education tax breaks such as Hope Scholarship and lifetime learning credits.
Job-seeking is a rich source of tax deductions, said Bob Scharin, editor of Warren, Gorham & Lamont's "Practical Tax Strategies" magazine.
Everything from the cost of printing and mailing resumes to long-distance calls and mileage for driving to job interviews can be deducted as a miscellaneous expense once they exceed 2 percent of income. Job training expenses can be deducted, provided the training is in the same field as the previous job.
"Keep receipts," Scharin said. "If you are driving to interviews, keep records of where you drove, what day and how many miles."
Those who find a new job can deduct moving expenses, provided the new job is at least 50 miles away.
Being unemployed allows some people who have money in the bank to take advantage of their income dip and make a contribution to a deductible individual retirement account, which lowers the effective tax rate even more.
"It sounds silly for some people, but for others it could be a way to pick up a tax deduction by moving from one account to another," Scharin said.
Get those glasses
"If you're told your last day is in two weeks, that's the time to go out and buy new eyeglasses or get new prescription refills," he said.
Those facing joblessness should also remember that loans from 401(k) balances for purposes such as home purchases come due on job termination, even when laid off, accountants say. Failure to repay will be penalized by the IRS.
People who lose their jobs may want to consider the consequences of freelance work, which is subject to payroll taxes and may reduce unemployment benefits.
"If you're just thinking about doing a few small consulting projects, you really should crunch the numbers to see it if will be worth it," Moore said. "For example, you need to figure out how much income it will bring in versus how much you could lose in unemployment benefits, depending upon your state's eligibility and benefit laws, and how much you may be obligated to pay" in Social Security and Medicare taxes.