Unemployed? We’ve got some tax tips for you

We’re hearing it everywhere.  Times are tough.  If we haven’t been directly affected by the economy, odds are we know someone who has.  Everyone is cutting back, and that includes businesses.  If you’re one of the millions of people who have lost a job lately, there are some things you should know about being unemployed and how it may affect your taxes this year.

Let’s start with some good news.  The American Recovery and Reinvestment Act (the 2009 Stimulus) included some new stipulations to unemployment income.  Here’s the main tax highlight:

– The first $2400 of your unemployment benefits is completely tax free (this only applies to Federal taxes—states have the right to tax unemployment pay and, at this point, we’re not sure how many states will do the same as the Federal Government).  After that, you’ll still have to pay taxes (more in a bit on how to deal with this).  The tax break only applies to 2009, though.  If you collected unemployment payment in 2008, you still have to pay taxes on that—regardless of how much.

That takes care of the Stimulus.  Here is some more information that will help you as you begin to plan for your taxes:

What’s Taxable?—

Severance:  Any severance or compensation you received from your employer as part of a termination package is taxable.  Along with this, if you received compensation for any vacation or sick time that you had accumulated, you’ll need to pay taxes on these if they aren’t already taken out.  Your final W-2 will document if taxes were withheld or not, so pay attention to that.  Remember, your employer may not have given you the final W-2 right after you left your job.  They’re allowed to wait until the end of the year (January 31st) to issue it, so don’t forget about including it with your return.

Odd Jobs:  If you did any odd jobs while you were out of work, the income you collected for them is taxable, so keep track of it (this would be entered on a Schedule C as business income).

Unemployment Income:  As I stated above, unemployment income after the first $2400 is taxable just like any other income.  The twist here is that no tax is automatically withheld when you are issued unemployment pay.  If you want taxes withheld up front, you can submit a Form W-4V (Voluntary Withholding Request) to the office where you filed for unemployment.  Once you’ve done this, you will have 10% withheld for your Federal taxes.

Union Benefits:  Any union unemployment benefits must be reported on your return.  Since these are not government funds they are subject to income tax.

Other Important Information—

At the end of the year, if you’ve received unemployment benefits, you’ll get a Form 1099-G that will report what you collected.  The IRS will also receive one.  You should enter this under “Other Income” in TurboTax under Federal Taxes.

Finally, we’re all optimistic that our situation will turn around soon.  When this happens (and if you’re able to) consider paying back any unemployment compensation income you received.  If you can, then you’ll get to deduct what you reimbursed.