Millions of Americans collecting unemployment have more in common than being out of work — many don't realize that their jobless benefits are taxable.
A survey by the Tax Institute at H&R Block in 2009 found that 73 percent of taxpayers were unsure about how to handle unemployment compensation on federal tax returns.
The bad news for the 2010 tax year is that benefits are fully taxable, unlike in 2009 when the first $2,400 was tax exempt. Recipients can voluntarily have federal income taxes withheld from their benefits by filing a Form W-4V, but many people don't do that.
Those caught by surprise by a tax bill they can't pay should still file their return by this year's April 18 deadline, sending in what they can to avoid the stiffest penalties.
The penalty for not filing is 4.5 percent per month.
The penalty for paying late is 0.5 percent per month. The total penalty tops out at 47.5 percent of the tax owed.
Taxpayers who received jobless benefits last year should receive a 1099-G statement showing how much they were paid. That income should be reported on line 19 of IRS Form 1040, line 13 of Form 1040A or line three of Form 1040EZ.
Unemployed people who itemize deductions should keep close track of job-search costs, said Jennifer Rempe, lead tax research analyst at the Tax Institute.
Job-hunting expenses are classified as miscellaneous itemized deductions, which must exceed 2 percent of income before they can be claimed.
Some examples of deductible expenses related to the job search are mileage costs for driving to an interview; lodging, meals and transportation expenses for out-of-town interviews; and the cost of professional resume and placement services.
When it comes to job-related travel expenses, "Make sure the primary reason for the travel is looking for a job," Rempe said. "Don't plan a family vacation and go on a few interviews and write the whole trip off. That isn't acceptable."
Taxpayers who relocate for a new job can deduct qualified moving expenses without itemizing.