The unemployed have to pay full taxes on their unemployment benefits in 2010, unlike 2009 when the first $2,400 was tax-free. • Those individuals who did not withhold taxes on unemployment benefits are sometimes surprised with an extra $10,000 in income to report in April of the next year, said Annabelle Rodriguez, a tax adviser for H&R Block.
Unemployed taxpayers can elect to have 10 percent of their unemployment payment withheld from each check by filing Form W-4V: Voluntary Withholding Request. Unemployed workers who have been paid unemployment compensation in 2010 should receive Form 1099-G showing the amount.
Lynn Brewer, principal of the tax firm Friedman Cohen Taubman in Plantation, said people who receive unemployment benefits often have different types of income to report. They may have severance or unused vacation pay from their previous employers, unemployment benefits and self-employment income for freelance or odd jobs during the year.
Consider your spouse's income when deciding whether to withhold taxes from your unemployment payments. An unemployed person who is married and filing income taxes jointly might be best to withhold taxes to avoid surprises, Brewer said. But for a single person with only unemployment benefits as income, any tax owed could get canceled out in a lower tax bracket.
The Earned Income Tax Credit is another way for those who are unemployed to reduce their tax bill. To qualify, the taxpayer must have earned less than $13,460 as a single filer with no children. This caps at $48,362 in income for married couples filing jointly with three or more qualifying children, according to H&R Block.
Deductions from a job search are available only to those seeking a new job in their current occupation or industry. People must itemize their deductions, which must exceed 2 percent of their adjusted gross income, Rodriguez said.
Job search tax deductions can include long-distance phone calls, vehicle mileage for interviews, professional placement service fees, printing and mailing resumes, and unreimbursed travel for interviews. So keep a record of your expenses.