Tax Insider: Tax Tips for the Unemployed, Part 1 - Black Enterprise

Tax Insider: Tax Tips for the Unemployed, Part 1

Unemployment benefits are taxable for 2010.

You can’t wish your taxes away just because you’re unemployed. And–to add insult to injury–your unemployment insurance benefits and severance pay are taxable, too, meaning a percentage of the money you receive from your state government and your employer to hold you over until you find a new job has to go back to the federal government. talked with a spokesperson at the IRS for this week’s Tax Insider, to find out what action the unemployed can take before tax time to make sure they don’t end up with an April Fool’s surprise next year.

Change your withholding status.
Go to your state unemployment insurance benefits office and ask for a Voluntary Withholding Request Form or a W-4V to have a flat amount withheld from your checks for taxes.  If you want federal income tax withheld from your unemployment compensation, check the box on line 5. You are permitted to have 10% withheld from each payment. No other percentage or amount is allowed.

Ask the IRS for Help.
If you owe money to the IRS and you can no longer pay it, contact them to make a new arrangement. The IRS used to look at the past three years of income to determine whether or not the taxpayer had the ability to pay. Now it will not only look at a taxpayer’s current income but his or her future ability to pay. Taking that into consideration, the IRS may postpone collection actions in what is known as a levy release, where it may provide additional flexibility when determining “an offer in compromise” –an agreement between the IRS and a taxpayer who has no ability to pay to settle their debt for less than what is actually owed to the IRS, according to Michelle Eldridge, chief of national media relations at the IRS. But remember, if you end up making more money in the future, the IRS will go back and renegotiate what you’re able to pay.

Apply for advanced payment on the earned income tax credit.
The Earned Income Tax Credit (EITC) is a refundable federal income tax credit for low to moderate income working individuals and families. Your income may have been too high for you to be eligible when you was employed, but when you file your taxes next year you might qualify. If you expect that your 2010 earned income and adjusted gross income will each be less than $35,535 ($40,545 if you expect to file a joint return for 2010) and you have at least one qualified child, you might be able to receive advanced EITC payments in your unemployment check. Go to your state unemployment office and fill out form W-5 . Keep in mind that if you get advance EITC payments and find you are not eligible for the EITC come tax time, you must pay back the payments when you file your 2010 federal income tax return.

Check back next week  at the Tax Insider for more ways to earn tax credits that will help you find a job.

For more information visit:
Tax Center for Unemployed Taxpayers

The Tax Impact of Job Loss

How to Get Your Unclaimed Tax Refund

Overlooked Tax Breaks