Unemployed? You could qualify for tax breaks

3:56 PM, Feb 12, 2009   |    comments
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The following story appeared recently in USA Today.  KSDK is looking to localize this story and is looking for anyone who has recently joined the ranks of the unemployed, and has tax related questions.

If you would be interested in telling us what happen to your job and get some answers to your tax questions, please send an email to Jordan Palmer at  jpalmer@ksdk.com.

---------------------------------------------------------------------------------By Sandra Block, USA TODAY

If you're unemployed, your tax bill will probably decline. That's small consolation - sort of like suggesting that going bald isn't so bad because you'll save money on shampoo. Given a choice, most people would rather have a full head of hair and a job.

Still, if you were laid off last year, you could be eligible for a host of tax deductions and credits that could put money in your pocket when you need it most. Tax breaks that could become available when your income is down:

Deduction for medical expenses. Co-payments, deductibles and other unreimbursed medical expenses are deductible only if they exceed 7.5% of your adjusted gross income.

The income cut-off prevents most people with jobs and employer-provided health insurance from deducting medical expenses. But if your income has declined and you're paying more for health care, the threshold could become easier to cross.

Under a federal law known as COBRA (Consolidated Omnibus Budget Reconciliation Act), you can continue your former employer's coverage for at least 18 months. To maintain coverage, though, you must pay the entire premium, plus an administrative fee. These expenses qualify for the medical expense deduction, says Leslie Laffie, tax analyst for Thomson Reuters.

Many employees who can't afford COBRA opt instead to buy an individual insurance policy. Premiums for these policies are also deductible, Laffie says. And if you're required to pay a specific amount out-of-pocket before your insurance kicks in, those payments also count toward the medical expense deduction.

Miscellaneous itemized deductions. Expenses that fall into this category include tax preparation costs, safe deposit box fees and - significantly, for unemployed people - job search expenses. To claim this deduction, your combined miscellaneous expenses must exceed 2% of your AGI, so this is another break that becomes more accessible when your income has declined.

Your can deduct job-hunting costs even if your search was unsuccessful, Laffie says. However, you must seek a job in the same business or trade where you were previously employed to deduct those costs.

"If you were a teacher, you have to be looking for a job as an educator, vs. looking for a job as an engineer or accountant," she says.

Deductible job-hunting expenses include résumé preparation, unreimbursed travel for job interviews, long-distance calls to potential employers and subscriptions to job-search websites, Laffie says.

Earned income tax credit. This tax credit is designed to help low- and moderate-income families offset the cost of paying Social Security taxes. For 2008, the maximum earned income tax credit for a married couple with two children is $4,824.

Last year, the IRS provided $48 billion in EITC payments to 24 million Americans, IRS Commissioner Doug Shulman says. Still, the IRS estimates that more than 20% of taxpayers who are eligible for the credit don't claim it. That percentage could be even higher this year because of the economic downturn, Shulman says. "There may be a whole set of taxpayers who have never been eligible for EITC who this year are eligible," he says.

In general, a married couple with two children is eligible for the EITC if their 2008 AGI was less than $41,646. If you're eligible for the federal credit, you may also qualify for a similar credit from your state or local government. Twenty-two states, Washington, D.C., and Montgomery County, Md., offer residents an earned income tax credit. To find the complete list, go to www.irs.gov and click on

"Earned Income Tax Credit."

IRS Taxpayer Assistance Centers at about 170 locations around the country will be open Saturday, Feb. 21, to assist EITC-eligible taxpayers who can't visit one of the centers during the workweek. To find the addresses and hours of these centers, go to the IRS website and click on "Contact My Local Office."

While unemployment will lower your tax bill, it may not fall as much as you expect. That's because the IRS treats unemployment benefits as taxable income, and some states do, too.

Most states allow you to have taxes withheld from your unemployment benefits, which are documented on form 1099-G. If you have other sources of income - such as wages from a spouse's job - having taxes withheld might be a good idea, says Robert Seltzer, a certified public accountant in Beverly Hills.

But if unemployment benefits are your sole source of income, it's probably not necessary, Seltzer says, because you probably won't owe much - if anything - when you file your taxes. The Senate version of the economic stimulus bill would exclude up to $2,400 in unemployment benefits from taxes in 2009.

KSDK

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