Tax Tips for Unemployed and Freelance Workers

Workers who were unemployed for a significant period of time in 2009 and don't think it will be worth it to file their taxes should think again. If you've received unemployment insurance or earned money as a freelancer or consultant, there are several deductions and credits to check into as you file. They could net you a slightly larger tax refund.

Tax-Free Unemployment Benefits: For those unemployed workers who received unemployment benefits, while the benefits are indeed taxable, the first $2,400 has been classified as tax-free for 2009.

"That's the IRS rule that was introduced last year," says Bob Meighan, vice president of TurboTax. "That's something that everybody misses."

Job Search Expenses: Meighan also says unemployed workers may be able to deduct their job search expenses, but there's a catch: Taxpayers must have meticulously kept records of what they spent while looking for work, and the expenses are deductible "only to the extent that they exceed 2% of your adjusted gross income." For example, if a worker's adjusted gross income was $30,000 last year, job search expenses would have to exceed $600 before qualifying for a deduction.

"Common job-search expenses that often qualify include fees for resume development and professional services, long-distance calls, mileage driven to job interviews and other travel expenses like airfare or tolls," says Mark Steber, chief tax officer for Jackson Hewitt Tax Service. Steber also notes that job search expenses cannot be deducted if you are looking for a job in a new field, if there was a substantial break between the ending of your last job and the beginning of your search for a new one, or if you are looking for a job for the first time.

Moving Expenses: For those unemployed workers who moved to obtain work, the IRS says moving expenses are deductible as long as the new workplace is more than 50 miles farther away from their old home than their old job location was. If they had no previous workplace, the new job must be at least 50 miles from their old home.

Business Expenses: Since many workers have turned to freelancing and consulting to bring home the bacon, they should consider themselves acting as a small business. Once a person establishes themselves as a small consulting business, all expenses incurred running the business are deductible. "For example, if I'm out looking for my next consulting gig, those expenses are going to be deductible without regard to the 2% of gross adjusted income threshold for unemployed workers," said Meighan.

Meighan advises workers to set themselves up properly by filing to become a sole proprietor (if appropriate) or at the very least, creating a separate set of accounts to operate their business from. A separate credit card and checking account that is used only when handling freelance projects will make it easier when it comes time to itemize on Schedule C of the tax return.