Tax Insights

Over recent year over four million workers lost their jobs in the U.S.  For American workers who lost their livelihood, various tax provisions can help soften the blow and assist with the transition to new employment. Please tell your family and friends that have lost their jobs about the following:

Job-hunting expenses   The ability to deduct the cost of seeking employment is deductible in certain instances.  The deduction is allowed even if the attempt to obtain a new job is unsuccessful. Job-hunting expenses are not deductible, however, for first-time job seekers (e.g., recent graduates) or for taxpayers seeking employment in a new trade or business.

Moving expense deductions   If an unemployed taxpayer is able to obtain employment in another geographical area, he or she will be allowed a deduction for qualified moving expenses.

Education credits.   An unemployed taxpayer may conclude that he or she needs to retrain for a job in a new industry or profession. Two tax benefits, the American Opportunity credit and the Lifetime Learning credit, are available for qualifying low- and middle-income individuals to pay the cost of higher education. The credits are available for qualifying tuition and related expenses incurred by students pursuing undergraduate or graduate degrees or vocational training.

Retirement account distributions  The major financial asset of many unemployed taxpayers is their 401K or similar tax-deferred retirement account. Most of these plans are subject to a 10% penalty on early withdrawals, as well as the distribution being taxable when received. In many circumstances, however, the taxpayers may have to tap into these plan funds until new employment can be found. In these situations, the taxpayer should explore the exceptions to the 10% penalty and seek to structure distributions to comply with any of them.

Mortgage Relief Act of 2007  Taxpayers who have their mortgage restructured may benefit from provisions of the Mortgage Relief Acts. These Acts applies to the discharge of debt after 2006 and before 2013.  

Unemployment benefits Typically, unemployment benefits are taxable as gross income at the federal level and, in many states, are subject to state income tax as well. One of the recent changes is an exclusion of unemployment from gross income of up to $2,400 per individual.

Increased earned income credit for 2009   Workers who experience a layoff in 2009 are likely to have reduced earned income during the year. Certain low-income workers are eligible for a refundable credit termed the earned income credit (EIC).

COBRA subsidy   Lack of health insurance for a family whose policyholder has been terminated poses a substantial financial risk. Health coverage under an employer’s group plan may be continued for former employees and dependents for a period up to 18 months after loss of employment. Premiums are generally required to be paid by the terminated employee at no more than 102% of the policy premium.

Making work pay credit   The making work pay credit is a refundable credit against income tax of 6.2% of earned income, up to a maximum credit of $400 ($800 for joint return).

While the U.S. works its way through these bad economic times, you and your family and friends should be aware of these various tax provisions that have been provided to assist the unemployed and where possible take advantage of them.

Gary Fleming, CPA