All 2011 Unemployment Insurance Benefits Taxable
By Carole Feldman
The jobless rate is dipping, but millions of people are still out of work. And that could have implications when they file their income tax returns.
Collecting unemployment insurance benefits? All that you received in 2011 is taxed as income. Unless you requested that federal taxes be withheld, you could be in for a big surprise when you calculate taxes owed.
"People tend to believe unemployment benefits are still not taxable," said Bob Meighan, a vice president at TurboTax. That was the case in 2009, for the first $2,400 in unemployment benefits. But that provision was not renewed by Congress.
If it's any consolation, you may find yourself in a lower tax bracket because of reduced income, even counting the unemployment benefits. And you might also be eligible for tax breaks that you didn't qualify for before.
"If you have major household changes, say you lost your job in 2011, we encourage people to take a close look at things like the earned income credit," Internal Revenue Service spokesman Terry Lemons said.
He said people should go ahead and file their taxes even if they don't have the money to pay any taxes that are due. "There are more options there than many people realize," he said, including installment agreements.
The aftermath of the Great Recession, which gripped the nation from 2007 to 2009, is still being felt across America. Employers still worried about the state of the economy are hesitant to bring on new workers. And many of the more than 13 million unemployed people have stopped looking for jobs.
For those who spent part or all of 2011 searching for work, there are tax breaks.
"All of those job search expenses are deductible - the stationery, the long-distance phone calls, the hotels, anything you can relate to the job search," said Jeff Schnepper, author of "How to Pay Zero Taxes" (McGraw-Hill, 2011).
To qualify for this deduction, you have to be looking for a job in the same field or profession as your previous one. Expenses incurred trying to get your first job are not deductible. "Until you start working, you don't have a profession," Schnepper said.
You also have to itemize. And the cost of preparing your resume, working with job search services, mileage and other job search expenses has to exceed 2 percent of your adjusted gross income if you are to benefit, according to Greg Rosica, tax partner with Ernst & Young.
Make sure you save your receipts. "You have to be able to substantiate," he said.
Those out of work may find the jobs have dried up in their cities or towns. "Many people are picking up and moving to where the jobs are," Meighan said.
If you land a job across town or across the country, you might be eligible to take a deduction for moving expenses. "It's an above-the-line deduction, dollar for dollar a reduction in your income," Schnepper said. In this case, unlike job-search expenses, you don't have to itemize to take advantage of the deduction.
To qualify, there's a distance test that has to be met: Your new job has to be at least 50 miles farther from your old house than your former job was.
Also unlike the job-search deduction, you can deduct moving expenses even if this is your first job, provided your workplace is at least 50 miles from your former home. Same if you're returning to work after being unemployed, the IRS says.
And there's a requirement that you work at least 39 weeks in the new location over the first 12 months in the new area. You can take the deduction even if you started your job late in the year and won't meet the time test in 2011. But if you fail to meet it in 2012, you'll either have to file an amended return or report the deduction as income when you do your 2012 taxes.
The IRS says expenses that are "reasonable for the circumstances of your move." That includes the cost of moving yourself and members of your household, as well as your household goods and personal effects. Shipping a car or the family pet is covered.
If you drove to your new home during the first half of 2011, the mileage rate is 19 cents per mile. The rate for July through December is 23.5 cents a mile. Or, the IRS gives you the option of deducting the actual cost of gas and oil for the car. But if the car broke down on the move, you cannot deduct the cost of the repair.
The cost of lodging on the way to your new home is deductible, but not the meals you eat on the road.
These days, "moving can be hard to do," especially if you can't sell your house in the depressed housing market, said Mark Steber, chief tax officer for Jackson Hewitt Tax Services. If you decide to commute to the new job instead of relocating, those commuting expenses are not deductible.
To claim the moving expense deduction, file Form 3903 with your tax. IRS publication 521 provides more information.
If you went back to school to train for a new job, you may qualify for the American Opportunity Credit, which is partially refundable, or another education tax break.
Looking ahead to 2012, if you're still on unemployment you can use Form W-4V to voluntarily request that a flat 10 percent tax be withheld.
"Withholding on these payments is voluntary," the IRS said. "However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year."
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