Smart TaxesSmart Taxes

Jobless? You still owe income tax

The previous exemption of the first $2,400 in unemployment benefits from federal tax is over. Job-search costs, training for a new job and relocation expenses may be deductible.

By MSN Money Partner Jan 20, 2012 12:52PM

This post is by Carole Feldman of The Associated Press.


The jobless rate is dipping, but millions of people are still out of work. That could have implications when they file their income tax returns.


Collecting unemployment insurance benefits? All that you received in 2011 is taxed as income. Unless you requested that federal taxes be withheld, you could be in for a big surprise when you calculate taxes owed.


"People tend to believe unemployment benefits are still not taxable," said Bob Meighan, a vice president at TurboTax. That was the case in 2009, for the first $2,400 in unemployment benefits. But that provision was not renewed by Congress.


If it's any consolation, you may find yourself in a lower tax bracket because of reduced income, even counting the unemployment benefits. And you might also be eligible for tax breaks that you didn't qualify for before.


"If you have major household changes, say you lost your job in 2011, we encourage people to take a close look at things like the earned income credit," Internal Revenue Service spokesman Terry Lemons said.

He said people should go ahead and file their taxes even if they don't have the money to pay any taxes that are due. "There are more options there than many people realize," he said, including installment agreements.


The aftermath of the Great Recession, which gripped the nation from 2007 to 2009, is still being felt across America. Employers still worried about the state of the economy are hesitant to bring on new workers. And many of the more than 13 million unemployed people have stopped looking for jobs.


For those who spent part or all of 2011 searching for work, there are tax breaks.


"All of those job search expenses are deductible -- the stationery, the long-distance phone calls, the hotels, anything you can relate to the job search," said MSN tax columnist Jeff Schnepper, author of "How to Pay Zero Taxes" (McGraw-Hill, 2011).


To qualify for this deduction, you have to be looking for a job in the same field or profession as your previous one. Expenses incurred trying to get your first job are not deductible. "Until you start working, you don't have a profession," Schnepper said.


You also have to itemize. And the cost of preparing your resume, working with job search services, mileage and other job search expenses has to exceed 2% of your adjusted gross income if you are to benefit, according to Greg Rosica, tax partner with Ernst & Young.


Make sure you save your receipts. "You have to be able to substantiate," he said.


Those out of work may find the jobs have dried up in their cities or towns. "Many people are picking up and moving to where the jobs are," Meighan said.


If you land a job across town or across the country, you might be eligible to take a deduction for moving expenses. "It's an above-the-line deduction, dollar for dollar a reduction in your income," Schnepper said. In this case, unlike job search expenses, you don't have to itemize to take advantage of the deduction.


To qualify, there's a distance test that has to be met: Your new job has to be at least 50 miles from your old house.


You can deduct moving expenses even if this is your first job, provided your workplace is at least 50 miles from your former home. That's also true if you're returning to work after being unemployed, the IRS says.


There's a requirement that you work at least 39 weeks in the new location over the first 12 months in the new area. You can take the deduction even if you started your job late in the year and won't meet the time test in 2011. But if you fail to meet it in 2012, you'll either have to file an amended return or report the deduction as income when you do your 2012 taxes.


What's deductible?


The IRS says expenses that are "reasonable for the circumstances of your move." That includes the cost of moving yourself and members of your household, as well as your household goods and personal effects. Shipping a car or the family pet is covered.


If you drove to your new home during the first half of 2011, the mileage rate is 19 cents per mile. The rate for July through December is 23.5 cents a mile. As an alternative, the IRS gives you the option of deducting the actual cost of gas and oil for the car. But if the car broke down on the move, you cannot deduct the cost of the repair.


The cost of lodging on the way to your new home is deductible, but not the meals you eat on the road.


These days, "moving can be hard to do," especially if you can't sell your house in the depressed housing market, said Mark Steber, the chief tax officer for Jackson Hewitt Tax Services. If you decide to commute to the new job instead of relocating, those commuting expenses are not deductible.


To claim the moving expense deduction, file Form 3903 with your tax return. IRS publication 521 provides more information.


If you went back to school to train for a new job, you may qualify for the American Opportunity Credit, which is partially refundable, or another education tax break.


Looking ahead to 2012, if you're still on unemployment you can use Form W-4V to voluntarily request that a flat 10% tax be withheld.


"Withholding on these payments is voluntary," the IRS said. "However, choosing this option may help avoid a surprise year-end tax bill or a possible penalty for having paid too little tax during the year."


Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


More from MSN Money:


Jan 20, 2012 3:45PM
thanks again congress. 30+ years of work with as much overtime, weekends, and holidays that i could work and then i get to the top of my career field only to be replaced by younger workers that are paid substancially less than myself. many of my fellow older workers were also replaced within 6 months. age related, probably but good luck proving it. i also have a college degree and many trade certifications that kept me current as well as many licenses that provided even more expertise. problem is, I AM TOO QUALIFIED, at least that is what i am told. now i get bent over one more time. my UE benefits are a far cry from a free ride. i exhausted all my assets and investments only to face a tax bill for UE "insurance"? when i am working i never mind paying taxes and actually think all the loopholes should be shut. i was always getting flack for saying i gladly a  pay 40% tax rate as long as i knew everyone would have healthcare, housing, & social security in the end. i raised 2 sons that are currently in the military and am a veteran myself so a free ride is hardly what i seek. i take my commitment to my country and fellow citizens seriously. so to those who would politicize this post remember Nixon thought healthcare should be provided through a constitutional admendment & Reagan also supported national healthcare. check the facts before you spew your venom, please.
Jan 20, 2012 4:09PM
In a "free" society, wouldn't it be better if we got rid of this huge government intrusion into our lives? Our economy is consumer driven. So... tax spending and not earnings. In that way, we'll capture more tax revenue and eliminate this arduous and miserable yearly task of being forced to tell our servant government, under penalty of incarceration, all about our financial lives.
Jan 20, 2012 6:19PM
For many people that are on unemployment very long, they won't have enough income to be in a higher tax bracket or even above the poverty level. If that's the case they will have already lost everything they have. The IRS no doubt has plenty of room in federal prison for bankrupt Americans who can't pay their taxes. They should have room, they're letting hardened criminals out after only 35% of their sentence.,
Jan 20, 2012 5:42PM
I never understood why the govt deems these kinds of benefits as "taxable income". Why not just decrease them a little bit, and make them tax free? Or withhold the tax from them before paying them out? Why do they need to pay out the benefits tax free only to demand tax be paid on them at the end of the year?
Feb 5, 2012 5:11PM

I am 57 years old, and have worked since my farmer father put me on the tractor in the summers at seven years old.  At 57, I have already worked 50 years, and I'll dang sure not feel guilty about drawing unemployment for the first time in my life since the company I worked for for many years went bankrupt.  I have federal taxes withheld from my unemployment, and I actively look for work every day.  I believe my age is a factor in not finding a job.


After 50 years of working and indirectly supporting deadbeats of all types, many of whom could work if they wanted to, I will not, as I said, feel guilty about drawing unemployment.  Unemployment benefits are not welfare.  I'll draw it until I find work or it runs out.  If and when that happens, I will have to consider starting a small business or something.  I've paid my dues, and will not work for peanuts while being ordered around by some snotnosed kid.


I will also sign up for Social Security the first chance I get at 62.  If I wait until my full retirement age of 67, Social Security may not even be there, or if it is, it will be greatly reduced.

Feb 1, 2012 2:51PM

According to this article, the recession was between 2007 and ended in 2009.  I'm pretty sure the country is either at the bottom or still trying to find it.  In any event, definitely check your facts people.

Jan 20, 2012 3:40PM

itemize everything....down to the box a of staples used to staple the resumes together...

good time to clean out the garage if you are unemployed.

give away what won't sell and sell what you don't need or use..


collect cans @ 50 - 70 cents per pound...

write of any donation, the mileage to take the donation to the harity group, church, etc.

I just hope the economy picks up a little so we have less unemployed. I was unemployed after the company i worked for decided to close doors and was on it for almost 1 1/2 years.

I am still working today, but it is very hard to get a job. I started out working 60-70 hrs a week for 6 months straight but now it has slowed down and they laid off almost the whole plant. I now do the work of 3 people literally and not compensated any extra for it.

They stopped 401k matches and pay less into the benefits and took away one of the breaks.   I think that a honest days work should be paid accordingly, but am grateful to be employed still and take pride in my work and work ethic and will not let it change my performance output..

I was down on myself for a long time because i felt i had no purpose and unproductive and needed to earn my way. People actually want to work, so those out there please stop with the hateful mean things against those that did not request to be unemployed. Also part of your SS deduction goes towards this UI Insurance, don't let anyone tell you that you get it all for free and you didn't put into the system.

The Consumer's are the real job creators

God Bless America and Ron Paul 2012!

Jan 23, 2012 10:44AM

Pretty sad if one loses their job and has to pay taxes...




I know what it is like to go on unemployment; however, I can not feel sorry for those who are faced with a tax bill because of drawing unemployment. To the best of my knowledge all unemployment applications have an option to select having income tax taken out. If you selected NO then don't come crying on my shoulder. 

Feb 5, 2012 10:29AM
That would be just like the government to kick a man when he's down. I guess it's not enough to take most of our money. One day over taxation will bring this country down.
Feb 5, 2012 2:59PM

Do people getting welfare, or foodstamps pay taxes? Taxes on UI don't make sense to me.

Feb 5, 2012 9:22PM
I really don't get it, but the more I hear about it the more I hate all of you people.  what kind of sick fvckers are you that you advocate taxing UI benefits, food stamps and welfare but you let people like Mitt Romney hide money in offshore accounts, pay less % on his millions than Dave the barber on his 20K.

No wonder our country is in the fvcked up mess that its in. NOT because of the politicians but because of the AMERICAN PEOPLE, people who are too stupid, too ignorant, too racist, too this or too that to realize when something is for their own good.

and by the way, people who collect unemployment already paid taxes on it when they was working.

Jan 29, 2012 9:53AM
Of course it is taxable income.  It was originally withdrawn from your employer when you were working, instead of going straight into your pay.  Every single american got caugth with thier pants down after going on credit and spending sprees.  A good portion got screwed, but we are all part of the problem.  Live belowe your means, and save save save.
Oh for Christ sake what a stupid article.
  I dare the tax man  to try and take what Little dignity I have left as I HAVE NO MONEY and I am one of oh 15 million Americans that have stopped  looking for work

 there is no god damned Hyperlink its being sensored cuzzzzz I am One PISSED OFFF AMERICAN ......
Jan 29, 2012 12:19PM
And the final straw from the IRS is besides the tax owed its not considered earned income so no earned income credit what BS!
Jan 24, 2012 1:25PM
Go with the system and stay out of trouble! I paid taxes on unemployment back in the 70's and 80's and 90's. I owed I paid. You work and in a lot of cases you draw unemployment. I never was on welfare or food stamps even though I paid my share in taxes.
Jan 24, 2012 12:36AM
I'm not thrilled about paying tax on my unemployment benefits;  I pay, because there is the cost for living in USA (it's not for free). I don't see why anyone else should have to pay my tax bill.
 %10  tax is with-held to avoid IRS penalty for not paying quarterly estimated tax.
Feb 5, 2012 4:02PM
I had to stand on a street corner with a cardboard sign.  Do I have to pay taxes on 2 dollars in dimes and quarters?
Feb 5, 2012 5:37PM
Guess who started taxing unemployment....Regan
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.