Five Ways the Unemployed Can Lower Their Taxes

While unemployment benefits are taxable, there are ways that the millions of people out of work last year may be able to lower their taxes, according to CCH, a Wolters Kluwer business and the leading global provider of tax, accounting and audit information, software and services (CCHGroup.com).


"Most people would far prefer to have a job than get tax breaks for being unemployed," said CCH Principal Federal Tax Analyst Mark Luscombe, JD, LLM, CPA. "But if that's not the case, they should at least know how to lower their tax bill."

Additionally, taxpayers who are unable to fully pay their tax debt may see some relief as a result of new IRS rules related to liens and collection procedures. Chief among the changes is barring the IRS from filing a lien against a taxpayer's property unless they owe more than $10,000 and granting more lien withdrawals, even if the debt has not been fully repaid in some instances.
"Many people were struggling with tax debt while being out of work during the recession," said Luscombe. "The hope is the new rules will ease their burden as they get back on their feet."

1. Job search deductions. What's deductible and what's not can cause some confusion, as a recent survey by CCH's CompleteTax showed (http://www.cch.com/CompleteTaxUnemploymentSurvey2011.pdf). However, you can deduct on your 2010 tax return expenses incurred in seeking employment in your same line of business during the year – whether or not you managed to find a job by year-end. These costs can include printing and mailing of resumes, as well as travel and transportation expenses. However, if you are looking for a job in a new line of business or looking for your first job, job search expenses can't be deducted.

2. Medical expense deductions. You can deduct the costs of unreimbursed health care for yourself, your spouse and dependents if the costs exceed 7.5 percent of your AGI – including that of your spouse if you file a joint return. Someone out of work may be more likely to reach this income threshold. So it's important to track medical expenses. 

3. Moving expenses. Once you find a job after being unemployed, you can generally deduct moving expenses not reimbursed by your employer if the job is more than 50 miles farther from your old residence than your old workplace was. 

4. Avoiding penalties on retirement withdrawals. If you need to take a withdrawal from your IRA, you can avoid an early withdrawal penalty by establishing a payment schedule of regular equal withdrawals over your lifetime or the joint lives of you and your beneficiary until you reach age 59 1/2. Penalty-free distributions can also be made from IRAs by unemployed individuals to pay health insurance premiums. 

5. Freelance tax breaks. Those who decide to take on freelance work will need to study up on the self-employment tax laws, including paying both employee and employer Medicare and Social Security taxes. That said, there are some tax breaks as well for the self-employed, including the ability to deduct 100 percent of health insurance premiums, home office expenses, journals and professional association fees and business travel expenses. However, if you earn more from freelancing than your state allows people collecting unemployment benefits to earn, you may lose those benefits – and if your freelance work dries up, you won't be eligible to have your unemployment benefits restarted.

 Health insurance for the unemployed