If you’re newly unemployed, your income has probably fallen significantly. As a result, your income tax situation most likely has changed, too.
At your new income level, you might be eligible for certain tax deductions and credits that can be claimed only by taxpayers at lower income levels. On the other hand, you might owe taxes on new types of income such as severance pay and unemployment benefits. The best thing to do is to assess your tax situation while you’re looking for a new job.
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1. Do your taxes
Filing your taxes might seem obvious, but you’d be amazed at how many people forget to do it, especially if they’ve been jobless for a long time. In most cases, if you’re under 65 and your filing status is single, you’ll have to file a return if your taxable income is more than $12,400 in 2020. If you’re under 65 and filing a joint return, you’ll typically have to file a return if your taxable income is more than $24,800. You will also need to file a return if you’re self-employed and net more than $400 for the tax year.
2. Sign up for government benefits, including tax-free programs
For most people, reducing your expenses is vital when you’re unemployed, and government benefits are a great way to do that. Each year, the federal government, state governments, and local governments provide $1.8 trillion in aid benefits. From health insurance to auto insurance, you might be eligible for programs that cut your costs. Depending on your location, such programs might include:
- Low-cost health insurance
- Help with food
- Reduced utility costs
- Phone service assistance
- Low-price automobile insurance
3. Revisit your tax credits
As income goes down, tax credit eligibility often rises. You might be surprised to learn that you qualify for larger tax credits than you expected. Be sure to take a second look at these tax credits:
- Child Tax Credit. You may be eligible for a larger portion of the Child Tax Credit. This credit can be for an amount up to $2,000 per qualifying child.
- Child and Dependent Care Credit. If you’re paying someone to take care for your child while you’re working or even while you’re looking for work, the amount you spend might be deductible based on your income level for the tax year.
- Earned Income Tax Credit. Many people think the Earned Income Tax Credit is only for families with very low incomes, but that’s not true. If you have children, you might qualify. The credit amount increases with the number of qualifying children in your family. If you have three qualifying children (or more) you may be eligible for a credit up to $6,660 for tax year 2020.
- Savers Credit. Depending on your income, you may qualify for a credit up to $1,000 if you’re single ($2,000 if filing a joint return) when you make contributions to a qualified retirement plan. To qualify for this credit for tax year 2020, single taxpayers can’t have Adjusted Gross Income (AGI) above $32,500 and joint filers can't have more than $65,000.
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4. Report any termination payouts you receive
If you collected a windfall when you were terminated, including payouts for unused sick days, vacation days, or severance pay, those funds are typically taxable income in the tax year you receive them. Your former employer should include such payouts on your W-2 for the year.
5. Remember to count your unemployment benefits as taxable income
Even though unemployment benefits come from the government, they still are subject to taxation. When you complete your tax return, remember to add any unemployment compensation you received to your other income. The amount to report should appear on Form 1099-G, that your state will send to you soon after the tax year concludes. Your copy of Form 1099-G will tell you the amount of unemployment benefits paid to you during the tax year. That’s the amount to include on your tax return.
To ensure you receive all of the tax credits and deductions you might qualify for, let TurboTax guide you through filing your tax return. We’ll ask simple questions about your tax situation and identify the tax breaks that can lower your tax bill or possibly put a refund in your pocket.
For more information about unemployment compensation and potential tax benefits, visit the TurboTax Unemployment Benefits Center. You’ll get the financial and tax answers you need.