What happens to your taxes when you’re unemployed?

Young unemployed business woman sitting on a park bench, reading the help wanted ads with a box of her office possessions beside her. Young unemployed business woman sitting on a park bench, reading the help wanted ads with a box of her office possessions beside her. Image:

In a Nutshell

When you’re out of work, unemployment checks can help keep you financially afloat. But those payments are often subject to taxes. Here are some tax tips for unemployed people, including credits you may qualify for now that your income is less.

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When you suddenly become unemployed, figuring out your tax liability likely isn’t your most urgent priority.

But even if you don’t have a steady 9 to 5, you’re still responsible for paying any taxes you owe come April.

As of March 2018, the unemployment rate was 4.1%. Historically, that’s not too shabby, but it still means that thousands of Americans are still seeking full-time or part-time work. If you’re one of them, here are some tax tips for unemployed workers that could help.

Your tax responsibilities when you’re unemployed

When you’re out of work, unemployment benefits can help keep you going financially — hopefully until you can find another job.

Unemployment benefits can come from multiple sources, including the following:

  • The Federal Unemployment Trust Fund
  • State unemployment insurance
  • A company-financed fund (which may not be taxable)
  • A private fund to which you voluntarily contributed

Generally, unemployment income is taxable. However, if you receive unemployment benefits from a private fund  to which you voluntarily contribute, it’s only taxable if your benefits you receive exceed the amount you paid into the fund.

In addition to paying tax on unemployment benefits, if you worked part of the year before losing your job, you may also be responsible for paying tax on any of those wages.

Typically, employers withhold federal and state taxes from wages, based on how much you earned and information you provided on your W-4 form. Whether you owe any additional tax on those wages will depend on the selection you made on your W-4 form and whether your former employer withheld enough federal income tax from your paycheck. If they took out too little, you could owe taxes on that income when you file your return.

Paying taxes when you’re unemployed

You have multiple options for paying your taxes when you’re unemployed.

You can choose to have federal income taxes withheld from your unemployment compensation, or you can choose not to do so and just pay estimated taxes each quarter to avoid a tax bill when you file your return.

Of course, you could also wait until you file your taxes and pay any tax you owe at that time. However, be aware that there may be repercussions. The federal tax system is pay-as-you-go, so you’re supposed to pay taxes on income as you receive it throughout the year. If you don’t pay enough throughout the year, a big tax bill in April might not be your only worry. You could also face a penalty for underpaying your estimated taxes.

You may think your unemployment income will be so little that you don’t have to file a federal return at all. But Grapeson Wilson (founder and principal accountant at Grapeson M. Wilson CPA, LLC in Houston, Texas) says that, if you’re unemployed, you likely should file a tax return if certain conditions apply to your situation.

“If the state issued you an IRS Form 1099-G for the unemployment compensation, you may need to file a tax return,” Wilson says.

In addition to unemployment compensation, you may have other income sources, like interest income, dividends or distributions from retirement plans, Wilson notes. If all those sources added up put your gross income above the filing threshold for your age and filing status, you must file a federal income tax return. And you’ll have to report your unemployment compensation as part of your total income.

Tax deductions and credits when you’re unemployed

You may be required to file a tax return when you’re unemployed, depending on your situation — and doing so can have benefits. If you’re eligible for any refundable tax credits, the only way to get them is to file a tax return. And itemizing deductions may allow you to recoup certain expenses incurred while you were unemployed.

Earned Income Tax Credit

The Earned Income Tax Credit, or EITC, is a federal income tax credit for working people with low to moderate income. If you earned money through wages or self-employment work before losing your job, you might qualify for this credit in the tax year in which you had eligible income.

However, unemployment benefits don’t count as taxable income for the purpose of the EITC, so if you didn’t have any earned income in the tax year, you won’t be able to claim this credit. Eligibility also depends on other factors, including your filing status, the number of qualifying children you can claim, and the amount of your earned income.

The credit is refundable, meaning that, in addition to reducing the amount you owe, it could give you a refund.

Dependent care and child tax credits

If you have children, you may qualify for the child tax credit. For your 2017 taxes, the nonrefundable credit could give you up to $1,000 per child younger than 17 provided you met qualifications, including income limitations. Tax reform temporarily increased the child tax credit to $2,000 per qualifying child and added a nonrefundable credit of $500 per other qualifying dependent between Jan. 1, 2018, and Dec. 31, 2025.

If you had to pay someone to watch your child or other dependent while you looked for work, you may also be able to claim the nonrefundable Child and Dependent Care Tax Credit. The amount of credit is between 20% and 35% of allowable expenses, which are $3,000 for one qualifying person or dependent, or $6,000 for two or more qualifying persons or dependents.

The percentage is based on your adjusted gross income, and you must have earned income in order to claim the credit. This means that if your only source of income in a year was unearned — from unemployment benefits, for example — you would not be eligible to claim this credit.

Retirement savings credit

In addition to certain IRA contributions being tax deductible, you may also be able to take a credit for eligible contributions to your IRA or employer-sponsored retirement plan. The amount of the Saver’s Credit ranges from 10% to 50% of contributions, up to $2,000 for single filers and $4,000 for those married filing jointly, depending on your income.

For example, if you’re single and your adjusted gross income is less than $18,500, you could get a 50% credit — up to $1,000 if you contributed $2,000 or more to your IRA. However, if you’re married filing jointly and have an adjusted gross income of more than $62,000, you can’t get the credit.

One deduction that’s going away

If you were out of work and looking for a job in 2017, you might be able to deduct job-search expenses from your federal income tax, provided you meet qualifications for doing so.

Qualifications include the following:

  • You paid the expense or incurred it during the tax year.
  • No employer reimbursed you for the expense.
  • The expense was ordinary and necessary.

However, Congress suspended this itemized deduction and other employee/work-related expenses for tax years beginning after December 31, 2017 as part of the Tax Cuts and Jobs Act. The suspension is slated to end Jan. 1, 2026, unless Congress revises the law before then.

How might tax reform affect your taxes? Learn more

Finding some help

When you’re unemployed, meeting your daily obligations — let alone tax responsibilities — can be difficult. So if you need additional help, consider taking advantage of any government assistance programs that can offset some everyday living expenses, like the cost of food, health insurance and utilities. Use the Benefit Finder on USA.gov to answer a few questions and find out which benefits you may qualify for.

If you can’t pay your taxes on time

Even if you’re unemployed, that doesn’t mean you should avoid filing a return. If you do owe the government money and can’t pay your taxes on time, the IRS offers several payment plan options that can help you.

However, be aware that not paying the full amount you owe by the filing deadline (April 17, 2018, for your 2017 federal income taxes), will mean you’ll pay interest and possibly penalties on the unpaid amount — even if you arrange a payment plan with the IRS.


Bottom line

Unemployment is a trying time for many people. Just remember that, even when you’re unemployed, you’ll likely have tax obligations. If you don’t have taxes withheld from your unemployment compensation, you should pay estimated taxes on this income throughout the year. If you don’t pay throughout the year, the IRS will expect you to pay the full tax you owe by the April 17 filing deadline, and you may face an underpayment penalty. You also may be subject to additional tax on the income you earned while working if you didn’t withhold enough.

If you’re struggling with juggling all your financial responsibilities while you look for a new job and are worried about your taxes, contact the IRS to learn your options. You may be surprised by the flexibility they offer in terms of payment plans. And other assistance the federal government can provide may help to get you through this tough period.