In an economic recession there are many people on unemployment who have never been there before. Even small business owners are laying themselves off. It might seem logical that no job would equate to no need to pay taxes, but that is not always true. Here are a few tax tips for incorporating unemployment funds into your return.
What is a 1099G?
In a personal finance situation where you received unemployment tax for any or all of the year, you will receive a 1099-G form in January. You may need to go online at Employment Security to download this form. This is similar to the W-2 you receive from traditional employers. The 1099-G lists the amount of income you received via unemployment during the year, any taxes withheld, and this information is also provided to the IRS.
Estimated or Withheld Taxes
In some cases, you can choose to have taxes withheld from your unemployment income just like you do with your employer. This information should show up on your 1099-G and you will include these withholdings as taxes paid when you complete your tax return. If you do not opt to have withholdings, you should make estimated tax payments each quarter, especially if you have no other taxable income during the year. If you do not make estimated payments, you are likely to owe taxes and interest in April.
Covering Taxes with Other Income
In some cases, the amount of money paid to you in unemployment will not increase your tax burden enough to cause a tax bill in April. For example, if you worked ten months out of the year and received unemployment two months, it is very likely that the taxes withheld from your paycheck over the ten months will cover your overall liability. Instead of owing taxes, you may only have a slightly reduced refund. The same may hold true if you are married filing jointly and your spouse continues to work.
Reducing Tax Burden through Credits
Depending on your income level, you may be eligible for breaks like the Earned Income Credit. You should read the instructions on your return carefully to ensure you do qualify before claiming such credits, because they can increase the chance of an audit. In addition to tax breaks, you may also be able to claim certain expenses to reduce the amount you owe. If you spend more than two percent of your adjusted gross income on qualified job search expenses, you may be able to claim them as deductions. Make sure you keep all receipts.