How Does Unemployment Affect Someone's Tax Filing?

How does unemployment affect someone's tax filing? Chances are, if you or your spouse has been unemployed for all or part of the past tax year, you've had a difficult time. As tax season rolls around, there...

Chances are, if you or your spouse has been unemployed for all or part of the past tax year, you've had a difficult time. As tax season rolls around, there may be some things you'll want to be aware of when filing your tax returns. Take some of the following information into consideration when preparing to file.


"Unemployment [compensation] is taxable; it's taxed on line 19 of Form 1040 under Form 1099-G," explains Brian K. Gilroy, Florida Attorney and CPA. Gilroy continues, "Unemployment is often not taxable at the state level, even if you live in a state that has taxes. The federal government does tax unemployment compensation. If you're unemployed you probably want to give 10% a month- have them withhold it."

If you haven't been working, your first instinct may be to take every penny available to you in unemployment. But, even though times may be difficult, having 10% of your unemployment compensation benefits withheld may save you from being presented with a big tax bill from the Internal Revenue Service.


Remember that, even if you were unemployed at the end of the year, if you worked for any part of the tax year, you may still be eligible for the Earned Income Tax Credit (EITC). This tax credit is for people who have worked in the tax year, and have earned a low to moderate income. By reducing the amount of taxes you owe, a tax credit means more money for you- and possibly a refund.

In order to determine if you qualify for the earned income tax credit, review the rules put out by the Internal Revenue Service Earned Income Tax Credit Questions And Answers:




- You must have a valid Social Security Number
- You must have earned income from employment or from self-employment
- Your filing status cannot be married, filing separately
- You must be a U.S. citizen or resident alien all year, or a nonresident alien married to a U.S. citizen or resident alien and filing a joint return
- You cannot be a qualifying child of another person
- If you do not have a qualifying child, you must:
-be age 25 but under 65 at the end of the year
-live in the United States for more than half the year, and not qualify as a dependent of another person
-Cannot file Form 2555 or 2555-EZ (related to foreign earn income)
-[Meet the] EITC thresholds and limitations

These 'thresholds and limitations' are, in the 2005 tax year, as specified by the IRS Thresholds and Tax Laws Updates:

Your earned income and your Adjusted Gross Income (AGI) must each be less than:
- $35,263 ($37,263 married filing jointly) with two or more qualifying children;
- $31,030 ($33,030 married filing jointly) with one qualifying child;
- $11,750 ($13,750 married filing jointly) with no qualifying children

It may be beneficial if you are collecting unemployment insurance to seek tax advice to ensure that your returns are correctly worked out to the best of your advantage. The good news is, you may be able to get help for free if your income is less than $38,000 per year. The Volunteer Income Tax Assistance (VITA) Program offers help in preparing your returns by trained volunteers. VITA assistance can be found across the country at various community centers, libraries, schools, shopping malls and other locations. VITA may even be able to offer free electronic tax filing.

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