As more U.S. workers find themselves unemployed for long stretches of time, solid tax planning becomes a more important habit. Unemployment can cause changes in your tax bracket and can result in both more and less allowable tax deductions. Understanding your tax status before the end of the year can help you avoid an unexpected tax bill and can help you know what information to gather during the year. Here are four important tax tips to employ if you are unemployed.
TUTORIAL: Personal Income Tax Guide
Calculate Taxes Before the End of the Year
If you are unemployed for part of the year and perhaps even change jobs, the amount of tax withheld from your paychecks and benefit checks may not be enough to cover your tax debt for the entire year. Employers don't take other income into account when figuring how much tax to withhold. In November or December, prepare a preliminary tax estimate, based on your income to date and your estimated income and deductions for the rest of the year. If your estimate shows that you will likely owe additional tax at the end of the year, you still have options, such as contributing cash or goods to charity and contributing to a qualified retirement plan in order to erase the extra taxes. (Do you need to figure out which tax bracket you belong to? Use our Tax Bracket (U.S.) Calculator.)
Track Medical Expenses
If your income drops substantially during the year due to unemployment, you may be able to claim some of your medical expenses, even if you haven't been able to in the past. Medical expenses must be more than 7.5% of your adjusted gross income to start claiming. If your income is lower this year or your medical expenses (including some travel costs for medical care) are higher, you may meet the threshold and be able to deduct some of your expenses, including doctor's visits, dental care and prescription drugs. Keep all of your medical expense receipts together so that you can add them all together when you are ready to prepare your tax return.
Deduct Your Moving Costs
Taxpayers who have to move from one home to another to be closer to a new job may be able to deduct moving costs. The new house has to be at least 50 miles farther from your old home than your old job was from that house. Deductible expenses include storage and transportation of your household items and travel expenses that you incur traveling from your old home to your new one. Track the number of miles you have to drive in the moving process, as well as any other moving expenses to deduct against the income from your new job.
Seek out Free Tax Filing Help
There are many options to get help with your year-end taxes if you qualify with a lower income. Many CPA Societies offer free clinics, where you can take your tax information and have professionals calculate and file your return. The IRS also offers a service called Free File Tax Service that will help you file your own return. To qualify for the IRS program, your adjusted gross income must be $58,000 or less. (For more help on filing your taxes, read Personal Income Tax Guide: Common Filing Mistakes.)
The Bottom Line
Losing your job can mean new tax realities for you and your family. Being prepared for the changes in your tax situation early gives you options to plan your year-end taxes owing more effectively. You may be able to take advantages of deductions that you didn't qualify for before or you may be subject to a larger tax bill, depending on your particular situation.