Tax Consequences of Unemployment
Sign up for our FREE Monthly Email Newsletter
In addition to keeping in the financial know, you may be interested in checking your credit score and report.
¹The credit scores provided under the offers described here use the Equifax Credit Score, which is a proprietary credit model developed by Equifax. The Equifax Credit Score and 3-Bureau scores are each based on the Equifax Credit Score model, but calculated using the information in your Equifax, Experian and TransUnion credit files. The Equifax Credit Score is intended for your own educational use. It is also commercially available to third parties along with numerous other credit scores and models in the marketplace. Please keep in mind third parties are likely to use a different score when evaluating your creditworthiness. Also, third parties will take into consideration items other than your credit score or information found in your credit file, such as your income.
²The Automatic Fraud Alert feature is made available to consumers by Equifax Information Services LLC and fulfilled on its behalf by Equifax Consumer Services LLC.
³Equifax Credit Report Control™ is only available while you have a current subscription to Equifax Complete Premier. Locking your credit file with Equifax Credit Report Control will prevent access to your Equifax credit file by certain third parties, such as credit grantors or other companies and agencies. Credit Report Control will not prevent access to your credit file at any other credit reporting agency, and will not prevent access to your Equifax credit file by companies like Equifax Personal Solutions which provide you with access to your credit report or credit score or monitor your credit file; Federal, state and local government agencies; companies reviewing your application for employment; companies that have a current account or relationship with you, and collection agencies acting on behalf of those whom you owe; for fraud detection and prevention purposes; and companies that wish to make pre-approved offers of credit or insurance to you. To opt out of such pre-approved offers, visit www.optoutprescreen.com/.
4We will require you to provide your payment information when you sign up and we will immediately charge your card $4.95. After that, we will charge the card $19.95 for each month you continue your subscription. You may cancel at any time; however, we do not provide partial month refunds.
Equifax® is a registered trademark and Equifax Complete™ Premier is a trademark of Equifax, Inc. © 2014, Equifax Inc., Atlanta, Georgia. All rights reserved.
Tax Consequences of Unemployment In Bell, Calif., the city manager, assistant city manager, and chief of police recently resigned in the government wage scandal of the decade. While they may collect unreasonably generous pensions, they won’t be collecting unemployment insurance (UI) benefits. In California, as…
In Bell, Calif., the city manager, assistant city manager, and chief of police recently resigned in the government wage scandal of the decade. While they may collect unreasonably generous pensions, they won’t be collecting unemployment insurance (UI) benefits.
In California, as in most states, in order to collect unemployment benefits you must be laid off, or your position must be terminated.
If you are among the 10 percent of the population who is unemployed, you may qualify to apply for benefits. Unemployment insurance benefits provide some money, but rarely enough to cover your rent or mortgage. And there’s a catch. Since the stipend is so small, people don’t realize unemployment insurance benefits are subject to income taxes.
Unemployment income is taxed for IRS purposes—at your highest tax rate, which could be anywhere from 0 percent to 35 percent, depending on your other income during the same year. Be sure to withhold federal taxes for at least 10 to 20 percent, depending on your other income for the year.
The state of California doesn’t tax unemployment income, so it shocked me to learn most other states do assess taxes on unemployment benefits. If your state is one that does, make sure you have enough taxes withheld to cover that liability.
Doing the responsible thing, having your taxes withheld, doesn’t leave much money to pay your bills. You will undoubtedly need to draw money from somewhere else.
Savings get depleted quickly—and there’s no tax consequence to drawing down your savings account. When you face early withdrawal penalties, you’re entitled to deduct those as adjustments to income on page 1 of your Form 1040.
Another smart tax move is to sell appreciated stocks. In 2010, there is a 0 percent or 15 percent capital gains rate for most stock profits.
What Are the Two Biggest Financial Mistakes Unemployed People Make?
1. People don’t file for state disability benefits when they are entitled to claim them. Did you know that state disability benefits are tax-free? They are usually higher than unemployment insurance benefits.
Often, I hear from people who were hospitalized or ill while unemployed who never switched their benefits to disability insurance—and ended up owing taxes needlessly.
Look at your situation. If you can find a legitimate reason to file for disability insurance benefits, do so immediately. Be sure to get a doctor’s written confirmation for your tax file.
You can avoid some of those penalties, but none of the taxes. If you’re going to draw money from a pension plan or 401(k)-type plan, first move the money to an IRA. Only money drawn from an IRA is entitled to the exceptions for payments to cover health insurance or medical expenses. There are some other exceptions to the penalty on page 2 of the instructions to Form 5329.
What Is THE Biggest Mistake Unemployed People Make?
Believing you’re going to find a new job earning what you used to. It’s time to face reality. If you haven’t found a comparable, acceptable job within three months, you won’t. Start looking at more practical alternatives so you can keep your home and your dignity.
Eva Rosenberg, EA is the publisher of TaxMama.com, where your tax questions are answered. Eva is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com.
Join TaxMama.com as a Family Member and get a free copy of Raven Davis Blair’s new book, Careers From the Kitchen Table Careers from the Kitchen Table – the 2010 Business Directory. It’s filled with at least 50 solid business ideas for businesses you can start from home.
Phantom Income from a Short Sale or Foreclosure? TaxMama Gives You Two Ways to Avoid the Tax
New Tax Increase for Wealthy Americans: Will You Pay More?
Tax Tips for Commercial Real Estate Owners
Hiring? Do Your New Hires Qualify You for Tax Credits?
Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.