Equifax

Finance Blog

Tax Strategies for the Unemployed

Written by Eva Rosenberg on September 24, 2012 in Tax  |   1 comment

At a recent dinner party, several people in attendance announced that they had just been laid off and were facing unemployment. Some were among the 300 folks laid off at Intuit. Others were from the L.A. Times, which recently stopped publishing Los Angeles Magazine. And…

At a recent dinner party, several people in attendance announced that they had just been laid off and were facing unemployment. Some were among the 300 folks laid off at Intuit. Others were from the L.A. Times, which recently stopped publishing Los Angeles Magazine. And still other attendees said that their clients were facing recent unemployment. The recession isn’t over yet, is it? Are you affected?

Unemployment income traps

If you’ve been laid off, you probably know that unemployment is available to you for a year or so. Did you also know that unemployment income is taxable? Yup—both for federal and tax purposes. Very few states (California is one) do not tax unemployment income. Be sure to take withholding from your benefits. You’ll be sorry later if you don’t.

Disability income is not taxable on the IRS or state level as long as you file for it before going on unemployment. Timing is important. If you file for unemployment first and then switch to disability, your disability will be considered unemployment income for tax purposes.

Plan your strategy to make sure this doesn’t happen. Before filing for unemployment, visit your doctor or therapist. Get a checkup to determine your eligibility for disability. Do you qualify based on stress or other emotional disability? If you’ve been under great pressure at work for some time, you might be manifesting physical symptoms. Are you planning surgery? Are you having a baby soon? Depending on your answers, you may want to get disability benefits started early instead of starting with unemployment.

What if unemployment isn’t enough to live on?

Unemployment isn’t generally enough to tide you over. You’ll need more money. Where will you turn?

The biggest mistake you can make is tapping into retirement accounts. First, the money is meant for your retirement. Second, these funds are very expensive—they’re subject to federal and state taxes and early withdrawal penalties. If you’re under age 59 ½, the IRS penalty is 10 percent, and there is also a state penalty amount.

Other ways to get money:

  • Sell stocks. The top federal capital gains rate is 15 percent.
  • Sell off your personal possessions. Holding a garage sale, using eBay, or hiring an auctioneer generates tax-free money. (You must report the sales. Getting less than you paid makes the money tax-free.)
  • Cash in savings bonds. The interest isn’t taxable for state purposes.
  • Stay with family or friends for two weeks and rent out your home for 14 days or less—more tax-free money.
  • Borrow from your home equity. Not the best idea, but it’s tax-free.

If you have no choice but to tap into retirement money, be smart. Roll your pension or 401(k) money into an IRA first. You can avoid some or all the early withdrawal penalties by using it this way:

  1. Health insurance—no penalties.
  2. Medical expenses—no penalties for expenses over 7.5 percent of your adjusted gross income.
  3. An annuity—with substantially equal payments each year.

Of course, you can also use up to $10,000 towards purchase of a first home, though you’re not likely to do that while unemployed—unless you can move to a new area and pay less than rent would cost. Or, if you qualify, you could file for permanent disability. Then all your draws would avoid the penalties—but not the taxes.

By the way, you won’t be unemployed forever, so once life starts returning to normal, you’ll want to rebuild your savings. Jeff Rose has some tips for you on how to get that started.

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 the new edition of Small Business Taxes Made Easy. Eva teaches a tax pro course at IRSExams.com and tax courses you might enjoy at http://www.cpelink.com/teamtaxmama.

1 comment

  1. Trying to do what is right..... says:

    Well….all in all, this is a pretty good article. The one thing I have found that does not ‘roll’ with the rest of the info is:

    ‘Of course, you can also use up to $10,000 towards purchase of a first home, though you’re not likely to do that while unemployed—unless you can move to a new area and pay less than rent would cost.’

    I have not been working for pay for 2+ years. I tried to just re-finance my mortgage (by God’s grace, I have not missed a payment, nor have I been late, ever), but, they will not even consider that since I can not show income for this time period. I have no idea how someone would ‘…purchase…a first home…unless you can move to a new area and pay less rent’. Where have you found anyone who would approve a loan for someone who can not show income even if they are going to ‘…pay less rent?! Please share the name of that institution so I can contact them :) It is sad to me that they will not even entertain the idea of helping me because I am ‘not behind/missing payments’…they will only help those who are. Something is wrong with this picture… Thanks for listening, and I look forward to hearing about those institutions you have found!


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

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.


Tax Archive

Stay Informed Sign up for our FREE Equifax email Newsletter