If you were one of the millions of unemployed individuals in the United States in 2010, you may be entitled to some tax deductions designed to benefit those who are temporarily out of work. Here are six tax breaks that anyone who was jobless during 2010 might be able to take advantage of, when filing 2010 taxes. (Rebounding from a stint of unemployment can be a frustrating thing to do. These tips should soften the blow. Check out How Unemployment Affects You (Even If You're Working).)
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1. Job Search Deductions
The government wants to see you get back to work - it's in their best interest, after all. For that reason, unemployed workers who are actively seeking new jobs are extended special tax benefits that allow them to deduct some of the costs incurred with the job hunt, regardless of whether the search has been successful. There is a stipulation to the break, however. If you are right out of college and looking for your first job, you're not eligible, nor are job seekers who transition into a field outside of their previous professions.
Eligible expenses include printing services for job-related tools like resumes or business cards, and portions of travel and transportation costs. According to CCH, a global provider of tax, accounting and audit information services, job search deductions can only be claimed if you itemize, and to the extent that those deductions exceed 2% of your adjusted gross income (AGI). Figure your deduction using Schedule A. If you were employed for part of the year, CCH also reminds unemployed tax filers to deduct unreimbursed employee expenses, business use of your home or car (minus commuting), business travel, tax preparation fees and investment fees.
2. Earned Income Tax Credit
The earned income tax credit (EITC) is actually designed to give tax breaks to lower income workers, not the unemployed. Nevertheless, if you worked a portion of the year before losing your job, you could qualify. EITC is also refundable as a credit. If you don't owe the IRS any tax and you qualify for EITC, you'll be refunded the credit amount.
3. Medical Expenses
If you spent more than 7.5% of your AGI on unreimbursed health care for yourself, spouse or dependents, you can deduct related expenses by itemizing. Eligible services for deduction include trips to the doctor, medication and treatments, and mileage to and from the doctor. The 2010 mileage rate for medical expenses is 16.5 cents per mile.
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4. Moving Expenses
If you relocated as a result having secured a new job, you can also deduct moving expenses. As long as you were not reimbursed or paid a bonus by your new employer for the costs of moving, and provided that the new job is 50 miles further away from home than your old place of work, these expenses could be tax deductible.
To be eligible, you have to relocate within a year of taking the job, and be a full-time employee for 39 weeks during the first year after the move. Though you don't have to wait until you've been there 39 weeks to claim the deduction, should you cease to be employed there before the 39-week mark, you'll have to file an amended return.
5. Retirement Withdrawals
If unemployment forced you had to dip into retirement savings, you can avoid some of the early withdrawal penalties under certain circumstances. (Remember, you are still required to pay tax on the actual withdrawn amounts). If you withdrew from an IRA to cover unreimbursed medical expenses, the withdrawn money isn't subject to the penalty.
If you withdraw retirement funds because of dire financial hardship (defined by the IRS as "an immediate and heavy financial need"), and used the funds for medical expenses, certain educational expenses and payments necessary to keep your home, the funds may also penalty-free. Further, CCH advises that if you establish "a payment schedule of regular equal withdrawals over your lifetime until you reach age 59.5" and you use the retirement funds to pay for health insurance, the money is also penalty-free. (Don't let these simple errors take the luster off your golden years. Check out 5 Tax(ing) Retirement Mistakes.)
6. Freelance Tax Breaks
If ventured into the world of freelance work while unemployed, you may qualify for some tax benefits. These include health insurance premiums (fully deductible), some home office and equipment expenses, professional association fees and qualifying travel expenses. Although you are unemployed, remember that you are still required to pay taxes on freelance income that you do earn (and that you must report).
The Bottom Line
While your actual unemployment benefits are fully taxable, the IRS does allow certain deductions that can help to lower your tax bill when you need extra cash the most. Educating yourself on the tax benefits designed to help the unemployed can help reduce your taxes owed until you get back into the workforce.