Unemployed? There's a Tax Break for That

Fewer people are losing their jobs, according to government reports. That’s good. But millions are still out of work and trying to stretch every dollar.

If you’re in this boat, keep in mind some tax breaks for the unemployed. They can boost a refund or reduce a tax bill.

CCH, a tax-information firm based in Riverwoods, Ill., lists a number of the most beneficial.

On your 2009 tax return, you can exclude up to $2,400 in unemployment compensation, which could save you $360 in federal income tax, assuming a 15% bracket. Unfortunately, this benefit is not available in 2010. (Severance pay and compensation for unused vacation and sick time are taxable.)

Some investors with IRAs and 401(k)s can make early withdrawals without triggering the 10% penalty that generally applies to taxable money taken out before age 59 ½. There are three opportunities.

The first covers withdrawals to pay tax-deductible medical expenses. This can be taken even if you do not claim an itemized deduction for medical expenses. Most health care expenses are deductible. This IRS explanation has details.

In the second case, you can avoid a penalty by setting up a schedule of regular withdrawals designed to continue over your lifetime, regardless of how old you are now. If your life expectancy, according to government tables, is 40 years from now, you could withdraw 1/40th of the account this year, 1/39th next year and so one. (To do this with a 401(k) you must no longer be with the employer who provided the plan, though you could be working elsewhere.)

The brokerage, bank or mutual fund company that has your 401(k) or IRA can tell you how to set up periodic payments.

Third, a person aged at least 55 can withdraw any amount from a 401(k), without penalty, so long as he or she is no longer working for the company that provided the plan.

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