Between jobs? Here are some things you should know regarding your taxes and not being employed.
Unemployment Compensation is taxable income. But use caution; there is no tax withholding on unemployment unless you specifically request it. You may request that income taxes be withheld from your unemployment checks by submitting a completed form W-4V, Voluntary Withholding Request, to the unemployment office where you applied for your benefits. Once your request is processed, 10 percent of your benefits will be withheld for federal taxes. Unemployment is not taxed by the state of California.
But note: Back pay, sick pay, unused vacation pay, and severance payments are all taxable income. If you should need to withdraw money from an IRA or pension plan, that, too, is taxable.
Job-hunting is deductible
Expenses incurred in looking for a job are deductible whether or not you get a job. One requirement is that you must be looking for a job in the same general field as your last job. Job-hunting expenses are taken as itemized deductions on Schedule A as miscellaneous expenses subject to the 2 percent of Adjusted Gross Income (AGI) limitation.
Examples of deductible job-hunting expenses are:
• Résumé preparation fees
• Postage for mailing résumés
• Career counseling and out-placement fees
• Newspapers, periodicals, and the like
• Employment agency fees
• Transportation to job interviews
• Out-of-town travel (the trip must be primarily for the purpose of looking for a job or going to a job interview)
• Professional fees incurred in preparing to conduct the interview
Expenses for child-care incurred while you look for a job qualify for the childcare credit, but you must have earned income during the year for the credit to apply. Qualified expenses are limited to the lower of: 1) $3,000, or $6,000 for two or more children; or 2) your earned income.
The unemployed can also write off medical costs if their bills add up to at least 7.5 percent of their AGI. This may sound like a lot, but if your income in a particular year fell to, for example, $20,000 a year, the deduction could be triggered if your health-related bills amount to $1,500 or more.
As a last resort, a home-equity loan could help pay the expenses. The good news is that the loan would not be taxable and could be used for virtually any purpose. The loan interest would be a deduction on your Schedule A. But beware: Taking out a line of credit or loan on your home puts your home at risk if you are unable to make payments. Carefully consider all your options first.
If your home or car is in jeopardy of repossession while you are unemployed, speak to your tax professional early so that you will understand how your tax situation would be affected in repossession.
Patrick Connoly is a tax advisor with H&R Block. For more information, visit www.hrblock .com, or telephone (323) 851-1040.