When you have taxes due, that typically means you have a source of income – such as your job. But have you wondered what happens when you suddenly become unemployed? Do you still have to pay taxes if you don’t have a job?
The hard truth is you are still required to file your taxes even if you’re unemployed, and this is due to taxable unemployment benefits and any other taxable income that you may have.
Taxes and unemployment are connected. Here’s how.
Taxes and Unemployment
Under the law, your benefits from unemployment are taxable, regular income. These benefits include your severance pay and unemployment compensation. Then The American Rescue Plan Act unemployment tax amendment came about, where federal tax up to $10,200 was waived. However, that was only effective for benefits collected in 2020. This means the government will tax unemployment again in 2022.
The following steps below will guide you through the tax process when you are unemployed.
7 Tax Steps for the Unemployed
1. Prepare your tax documents
The first step is to gather the forms you need. Depending on your unemployment situation, you need to familiarize yourself with the appropriate form to use.
- Form W-2 – If you were still employed for a portion of the same year you’re filing your taxes, you should have Form W-2. This form indicates your income for the year and how much tax you’ve already paid.
- Form 1099-G – If you have received any unemployment benefits from the government, you’ll be issued a Form 1099-G. This form shows your unemployment compensation, the state or local income tax refunds, credits, or offsets, reemployment trade adjustment assistance (RTAA) payments, taxable grants, and agricultural payments.
2. Report income from other sources
Whether your earnings come from being a creative freelancer or renting a property, that money is taxable and must be included in your filing. Failing to do so may be considered unemployment insurance fraud.
3. Leverage tax breaks
Tax breaks usually come in the form of deductions, credits, or even exemptions that reduce how much tax you owe, commonly known as your tax liability.
Below are a few tax breaks you may be able to take advantage of.
- Child Tax Credits – If you’re a parent of a young child, you may be eligible for Child Tax Credit or if you pay out-of-pocket expenses to support your child while actively looking for work. How much credit you receive will depend on how much you spent on child care and your adjusted gross income.
- Earned Income Tax Credit – EITC is a form of a tax break that helps low-to-moderate income earners to reduce their tax liability and eventually increase their tax refund. The IRS has an EITC assistant that will help you determine whether or not you qualify for this tax break.
- Saver’s Credit – If you have made contributions to a retirement savings plan in your previous employment, you might be able to leverage such contributions through Saver’s Credit. You must submit a Form 1040 tax return to file for this tax break. The credit you receive will be a percentage of your adjusted gross income reported on the form.
Besides tax breaks, you may also request to have your taxes withheld when you apply for your benefits. Fill out an IRS Form W-4V, Voluntary Withholding Request, and submit it to your state’s unemployment office. However, only 10% of your unemployment benefits can be withheld to pay federal taxes.
4. Deduct job hunt expenses
Before Dec. 31, 2017, you may have been eligible to deduct from your tax liability the expenses you’ve incurred while searching for a new job. However, this has been suspended for most taxpayers until Jan. 1, 2026, due to the Tax Cuts and Job Act.
But suppose you are part of the U.S. Armed Forces on active duty and looking for a new job. In that case, the IRS may allow you to deduct your expenses – specifically transportation – while searching for a new job.
5. Calculate your tax liability
Calculating your tax liability beforehand helps in financially and mentally preparing yourself for tax filing.
Here’s how to calculate your tax liability: Take the tax credits and breaks you’re eligible for and subtract them from your gross taxable income. You may also use the worksheet attached to Form 1040-ES, Estimated Tax for Individuals.
6. Pay your taxes
If you didn’t submit Form W-4V, Voluntary Withholding Request, you might be required to make quarterly estimated tax payments instead.
Whether you have enough money to pay your tax bill or otherwise, filing your taxes on time is better than being late.
According to the IRS, the penalty for failing to file on time will be 5% of your unpaid taxes for each month your tax return is late. On the other hand, failure to pay the taxes you owe will only be 0.5% of the unpaid taxes for each month you haven’t completed payment.
The IRS also offers electronic tax filing options to make it convenient for you as an expat.
7. Work with a tax professional
Filing taxes can often be overwhelming and understanding tax laws can feel like cutting through a jungle of legal jargon. Another area that commonly confuses taxpayers is calculating the exact amount of taxes owed, especially if you’re a foreign entrepreneur.
In these scenarios, working with a tax professional can clear your misunderstandings about how much tax you owe, what tax breaks you’re eligible for, and many more of your questions about the tax filing process.
Stop Making Unemployment Harder on Yourself
Unemployment can already be difficult. To prevent your situation from worsening, ensure that you take the necessary steps to file your unemployment taxes: compile the necessary forms, use tax breaks, and file your tax return on time.
Make the tax filing process much smoother as you work with Tax Samaritan’s trusted tax resolution partners who offer the best-in-class service.