Even jobless benefits get taxed

By Sandra Block
USA Today

When you're out of work, bills have a way of piling up. But as you cope with your debts, don't forget to put aside some money for the one creditor you can't afford to ignore: the IRS.

If you collected unemployment benefits last year, you'll probably owe taxes on the money. The IRS considers those benefits taxable income.

This often comes as a shock to unemployed workers, says Robert Doyle, a personal financial specialist in St. Petersburg, Fla.

The amount of your taxable benefits is reported on Form 1099-G, says Barbara Moore, an analyst at tax publisher CCH. States are supposed to send out the forms by Jan. 31, so if you haven't received one, contact your state unemployment office.

Report your benefits on Line 19 of the Form 1040, Moore says.

If you were out of work for a long time last year, you probably dropped into a lower tax bracket. But depending on the amount of benefits you collected, you could end up with an ugly tax bill come April 15. Fortunately, you can reduce the bill by taking advantage of job-hunting deductions.

Job-search expenses are categorized as miscellaneous deductions by the IRS. That means you must itemize to claim them, and the deduction is limited to expenses that exceed 2 percent of your adjusted gross income.

For example, if your AGI is $50,000, your deduction is limited to expenses that exceed $1,000. If you spent $2,000 on job-hunting costs, you can deduct $1,000 from your taxes. If you spent $900, you can't deduct anything.

The 2 percent threshold puts this deduction out of reach for many taxpayers. But unemployment, which usually results in a drop in income, may increase your likelihood of qualifying, says Donna LeValley, contributing editor for J.K. Lasser's Your Income Tax.

The key is keeping track of all your expenses. Some examples:

• Résumé preparation and distribution, including paper, stamps, copying and faxing costs.
  
  
• Long-distance phone calls to prospective employers.
  
  
• Unreimbursed travel expenses to interview for a job, including airfare and lodging expenses for an out-of-town interview.
  
  However, the primary purpose of such a trip must be business, not pleasure, says Jackie Perlman, tax specialist for H&R Block. Don't deduct a weeklong trip to California unless you can prove you spent more of your time job-hunting than you spent vacationing.
  
  
• Subscriptions to daily newspapers with classified ads, Internet job-search sites and professional magazines and newsletters.
  
  You can deduct job-hunting costs even if your search is unsuccessful.
  
  But the deduction is limited to the cost of looking for a job in your line of work. If you're a lawyer who wants to become an elephant trainer, you can't deduct phone calls to Ringling Bros. In addition to job-search costs, there are other deductions that may shrink your tax bill:
  
  
• Unreimbursed moving costs.
  
  If you move to take a new job, you may be able to deduct the cost. Moving expenses are an "above-the-line" deduction, which means you don't have to itemize to take them. The distance between your new job and former home must be at least 50 miles more than the distance between your old job and your former home.
  
  
• Health insurance premiums.
  
  Under a federal law known as COBRA, most employers are required to permit laid-off workers to continue their health insurance payments for at least 18 months. Workers must pay the premiums, plus administrative costs. For a family, this coverage can cost hundreds of dollars a month.
  
  If these premiums, combined with other unreimbursed medical expenses, exceed 7.5 percent of your AGI, you can deduct them.

Even if you take advantage of all your deductions, you could still find yourself stuck with a tax bill you can't pay.

That's a scary prospect, but ignoring the problem will make it worse, Doyle says.

File your tax return by the April 15 deadline and request an installment arrangement. The IRS will send you a letter explaining how to set it up. You'll owe interest and a failure-to-pay penalty.

But if you fail to file, you'll face even greater penalties, Doyle says.

And if you're newly unemployed, consider arranging to have taxes withheld from your benefits, Doyle says.

"It will reduce your benefits, but it will save you heartache in the long run," he says.

"The one creditor you don't want on your case is Uncle Sam."