by Lee Isaacson
Spending time on the unemployment line can be discouraging, stressful and nerve-wracking. Those feelings are heightened when unexpected expenses arise. To avoid encountering additional distress, the unemployed should remember Benjamin Franklin’s immortal words, "In this world nothing can be said to be certain, except death and taxes." Yes, taxes. Even for the unemployed.
With more people filing into the unemployment line every day, it’s critical we examine the major tax issues facing the unemployed. These include: the often misunderstood fact that unemployment benefits are taxable; the tax implications of taking part-time or subcontract work or making withdrawals from retirement accounts; issues related to the restructuring of debt; the dangers that arise from a failure to file; and misunderstanding what is and is not tax deductible. While understanding each of these issues will not make unemployment stress-free, it will help relieve some of the anxiety associated with unemployment and allow the jobless to focus more of their energy where it should be and that's on finding a new job.
Many recently unemployed people don’t realize that unemployment benefits are taxable. They think that because the money comes from the government, taxes have already been accounted for and removed. This belief is reinforced by formerly unemployed friends and family who think they did not pay taxes on their unemployment benefits. In all probability, they actually paid enough in income taxes during the part of the year for which they were employed that it made up for the portion of the year for which they were not. To avoid an unpleasant surprise on April 15th, unemployed Americans should consider filling out a Voluntary Withholding Request (W-4V).
To make ends meet, the unemployed often search for temporary work, including part-time and subcontract work. While this can be beneficial both financially and professionally, they will be required to file a tax return for any income over the minimum income level.
Another way the unemployed often try to get by is by making withdrawals from their retirement accounts. Not only are most early withdrawals from IRAs and 401(k)s saddled with a 10 percent penalty, the amount withdrawn is subject to taxation. That being said, there are ways to withdraw from these accounts without penalty. Depending on the type of account, these can include using the funds to pay for certain medical or education expenses, or setting up annuity withdrawals.
Cancellation of indebtedness (COD) income must be included in gross income for tax purposes. COD income can result when a lender forgives or reconfigures a borrower’s debt. Many of the unemployed are unaware of the tax implications that can result from a restructure of debt. If tax liability is not taken into consideration, restructuring can leave them far worse off than they were under the original loan specifications.
Among the unemployed who are aware that they may owe taxes, some make the mistake of adopting the Scarlett O’Hara “I’ll think about that tomorrow” attitude and don’t file on time, or ever. By burying their heads in the sand and filing late or not at all, the unemployed can be subjected to penalties and, in extreme cases, jail time. This only serves to make their situation worse. Instead, those who cannot immediately pay the taxes they owe should work with the IRS to set up a payment plan.
Finally, those who do file may fail to recognize what is and is not deductible. Deductible items can include expenses related to travel, interviews, mailing and printing, and resume services, just to name a few. Getting the most deductions possible can save thousands of dollars come tax day – dollars that can be reinvested in the job hunt or used to pay bills.
The unemployed cannot afford to be dealt another blow by falling into one of these easily avoidable pitfalls. To escape these threats, each should be taken into consideration by those dealing with joblessness. A thorough understanding of all possible dangers can help stop a bad situation from getting worse, and allow the out-of-work to keep their attention on the job search.
Lee Isaacson is a member of the Reznick Group’s National Operating Committee and has more than 26 years’ experience working with professional services firms, closely held commercial businesses and various real estate entities. Lee has experience in accounting and tax services including financial reporting and analysis, technical support, quality assurance reviews, financial planning, cash flow planning, estate planning, deal negotiations, and transaction and deal structuring. You'll find the company’s web site at ReznickGroup.com