In some cases, federal tax laws could pose new costs to unemployed individuals. But in others, tax provisions could help ease, at least a bit, the financial strains of unemployment.
Pay taxes on unemployment
First, the bad news. Unemployment compensation is taxable income. A few years ago, a small amount of unemployment benefits were exempted from taxation, but that tax break has expired.
You'll get a Form 1099-G that will tell you how much unemployment you must report on that year's tax return. If you opted not to have taxes withheld from unemployment payments or didn't make estimated tax payments on the amount, you'll likely owe the Internal Revenue Service.
Married couples have another option. If your spouse has a job, cover the unemployment taxes by having your husband or wife adjust his or her withholding to cover the taxes due on your benefits.
Check EITC eligibility
The earned income tax credit, or EITC, is a tax break for workers who don't make very much money. Because your overall earnings were reduced by your layoff, you now may be eligible for the EITC.
Unemployment benefits don't count toward EITC eligibility, but if you earned any other income during the year you can use that amount to calculate a possible credit claim. Also, if you are married and your spouse is working, your loss of income may now make your combined earnings eligible for the credit.
Single taxpayers can claim the EITC, but the benefit is greater for workers with dependent children.
