No one likes filing income taxes — especially if they are getting little to no tax refund — but it’s a process everyone has to go through. Filing income taxes with the Internal Revenue Service (IRS) is relatively painless when you have easy work forms to reference, but those who are recently unemployed do not have that benefit.
Filing taxes when you are unemployed is more complicated, but understanding what you need to do can take all the stress out of the process. This quick guide provides the tax tips you need to make the most of your situation.
Filing Taxes When You’re Employed
Everyone needs to file income taxes by completing and submitting Tax Form 1040 and any accompanying documents before April 15 each year. You might choose to do that yourself and mail them in, submit online, or let a tax advisor help you. You need to save any tax-related paperwork throughout the year, then wait for other documents to arrive. The most common items you might need to file your income taxes include:
- Form W-2
Full- and part-time employees receive Form W-2, which details their earnings for the year and shows the amount of taxes their employers withheld.
- Form 1099-MISC
Freelance and contract employees typically receive one or more 1099-MISC from anyone who paid them more than $600 for their services.
- Other 1099 Forms
You might receive other 1099 forms — such as 1099-DIV or 1099-INT — for dividends or interest you earned on investments.
- 1098 Forms
These forms are for things you’ve paid that need to be reported on your taxes, such as student loan interest (1098-E) and tuition (1098-T). These forms typically provide proof for these tax deductible items.
Once you receive these forms, you can accurately fill out Form 1040 (or a version of it) to file your taxes.
Filing Taxes When You’re Unemployed
You may not need to file taxes if you did not meet the required income threshold.
- If you lost your job in the middle of a tax year, you must file income taxes if you made more than $12,200 as a single filer under age 65.
- Those who file joint returns must file if their income is greater than $24,400.
Remember to file early because you might have a refund coming, which can help get you through a rough patch.
Pro Tip: Any severance pay you receive from your former employer is taxable income and could impact your tax bill.
Filing federal income tax when you’re unemployed also means you need to pay close attention to your deductions, especially if you’re collecting unemployment benefits. Unemployment compensation is taxable income, and you will receive Form 1099-G to provide the total amount of unemployment income you’ve received.
The Tax Cuts and Job Act (TCJA) says you cannot deduct any job search-related expenses until after 2025, so being unemployed does not provide any advantages with regard to deductions. You might qualify for one or more of the following tax breaks to reduce your taxable income, though:
- Earned Income Tax Credit (EITC)
The amount you can receive for 2020 ranges from $568 to $6,660, depending on how many qualifying children you have (or if you have any at all).
- Child Tax Credit
You can receive a maximum tax credit of $2,000 per child under age 17.
- Savers Credit
Depending on your income and filing status, you can claim the Savers Credit for up to 50 percent of the first $2,000 you contributed to a retirement plan account as long as your gross income isn’t greater than $32,000 as a single filer, $48,000 as head of household, or $64,000 as a joint filer.
If your unemployment is a result of closing your business and you were self-employed, a tax advisor can also help you deduct business loss on your income tax returns and minimize your self-employment tax.
You want to reduce your tax liability as much as possible and work to get a refund, especially if you’re unemployed. That are some other tax-free benefits you can take advantage of, too.
An Overview of Tax-Free Benefits
Each year, federal, state, and local governments distribute almost $2 trillion in benefits to aid those who need it. Here are the types of tax-free programs you might find in your city or state:
- Health insurance coverage
- Food assistance
- Income-based or reduced gas and electric service
- Income-based or reduced phone and internet service
- Reduced or low-cost auto insurance
Visit your county and state websites to find out more information about the benefits you might be able to use in your area.
What to Do When You Don’t Know How to File Your Taxes
Filing your taxes can be challenging, and you might feel unsure or overwhelmed about how to file your taxes after losing your job. It’s important that you take every deduction for which you are eligible and don’t miss any credits. A trusted tax advisor can not only take away the headache of dealing with your special situation, but also ensure that your tax returns are accurate and your potential for a refund is maximized.
Contact the Tax Experts
Unemployment carries uncertainty and adds to stress, especially when tax season comes around. You can file your taxes painlessly if you know the deductions and credits you can take, and take advantage of tax-free benefits to help you through this difficult time. Contact Silver Tax Group today to discuss your income tax return questions if you’re currently unemployed, or speak with an expert about other tax-related questions you might have.