Tuesday, March 03, 2015

Why You Still Need to File Taxes if You're Unemployed


Many unemployed Americans end up owing taxes because they are not aware that unemployment compensation or unemployment benefits are taxable. State unemployment insurance benefits up to 26 weeks and extended benefits, up to an additional 13 weeks are also taxable. Seven states fully exempt unemployment benefits: Montana, New Jersey, Alabama, Pennsylvania, Arkansas, California, and Virginia. Wisconsin and Indiana offer partially exempt unemployment benefits. All other states that offer unemployment benefits tax them in full.

When you apply for unemployment you have the option to have income tax withheld. If you do not choose this option you will be required to pay taxes on the money received when you file taxes for the current year and could end up owning thousands of dollars. You will receive a Form 1099-G of the following year which will show your total unemployment compensation and the amount of federal income tax and state taxes that were withheld if you choose those options. Even if you stopped receiving unemployment compensation it is to your advantage to file a return. You may be entitled to a tax refund.  

If you took early withdrawals from a pension plan or retirement account such as a 401k or IRA, the withdrawals are taxable unless they are rolled over into another qualified retirement plan or IRA within 60 days. If the withdrawal is used to pay for living expenses while you are unemployed the withdrawals are taxable. In addition, if you are under age 59 ½ you may also be subject to an additional 10% tax on early withdrawals unless your money is stored in a 457 plan. 

If you sold assets or property that you own, such as investments, a car, boat, etc. you may be subject to income tax if you had a gain on the sale. If you start a business or have other income on which federal income tax is not withheld, you may need to make estimated tax payments during the year. Filing bankruptcy does not discharge federal taxes owed.  Here are 16 options if you owe taxes and are unemployed.

  1. Loan.  Apply for a loan from a bank or credit union. The interest rate is much cheaper than setting up a payment plan with the IRS or a state taxing authority.
  2. Peer Lending. Apply for a private loan from a friend or relative or from a peer-to-peer lending company such as Zopa or Prosper.
  3. Hardship. Apply for a hardship withdrawal from a retirement plan or pension plan to pay for expenses including medical insurance expenses, facing foreclosure, short sale or considering bankruptcy. 
  4. Installment. Apply for an installment plan and setup an IRS payment schedule by filing IRS Form 1127. If you can pay the amount owed in 3 years. The IRS will charge a one-time fee. The fee will be added to the total amount of back taxes, penalties, and interest that you owe. You may be eligible for reduced penalties.
  5. Extend. Request an IRS extension and request the maximum extension time of 6 months.
  6. Savings. Use money in savings or checking accounts, savings bonds, stocks, mutual funds, etc. to pay the taxes.
  7. Life Insurance. Take out a loan from your life insurance policy.
  8. Borrow. Borrow money from family or friends.
  9. Earn extra money. Consider getting a part-time job or work overtime at your existing job to earn money to pay back your taxes.
  10. Pay. Even if you can’t pay the required amount owed, pay something and pay what you can afford. Interest is charged daily on unpaid taxes from Tax Day until the day you make the final payment.
  11. Short-Term.  If you can pay the taxes owed within 120 days contact the IRS to see if you can qualify for a short-term extension.
  12. Streamline agreement. If you own less than $25,000 and can pay the amount within six years, ask the IRS for a streamlined payment agreement using IRS Form 9465 which charges an application fee.
  13. Ask the IRS. Go to an IRS office to get advice on the best option to handle your tax situation.
  14. Offer in Compromise.  Request an Offer in Compromise if you cannot pay the total amount owed. This allows you to settle your tax debt for a smaller amount than you owe if you will be unable to pay back the amount owed within 10 years. 
  15. Credit Card. Pay by credit card if you don’t have the money when the bill is due.
  16. Home Equity. Apply for a home equity loan or sell some assets.

No comments: