16 Ways to Pay Your Taxes if You are Unemployed

There are over 10 million Americans are still 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 income is lower for the year.

If you took early withdrawals from a pension plan or retirement account such as a 401k, 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 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. You should expect to owe taxes of $1,000 or more when you file your annual income return.

Filing bankruptcy does not discharge federal taxes owed.  Here are 16 options if you owe taxes and are unemployed.

1. 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. Apply for a private loan from a friend or relative or from a peer-to-peer lending company such as Zopa or Prosper.
3. Apply for a home equity loan or sell some assets.
4. Apply for a hardship withdrawal from a retirement plan or pension plan to pay for expenses including medical insurance expenses, facing foreclosure or considering bankruptcy. 
5. 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 of $105. 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.
6. Extend. Request an extension and request the maximum extension time of 6 months.
7. Pay by credit card.  Pay by credit card if you don’t have the money when the bill is due.
8. Use savings.  Use money in savings or checking accounts, savings bonds, stocks, mutual funds, etc. to pay the taxes.
9. Life Insurance. Take out a loan from your life insurance policy.
10. Borrow. Borrow money from family or friends.
11. Earn extra money. Consider getting a part-time job or work overtime at your existing job to earn money to pay back your taxes.
12. Pay.  Even if you can’t pay the required payment, pay something and pay what you can afford. Interest is charged on unpaid taxes from Tax Day until the day you make the final payment.
13. 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.
14. 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 for an application fee of $102.
15. Ask the IRS. Go to an IRS office to get advice on the best option to handle your tax situation.
16. 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. The application fee is $150. 

Last Minute Tax Tips

Even though the deadline for filing taxes has passed, many taxpayers have not filed their taxes. If you are getting a refund you have to file within 3 years from the current tax year but you do not need to file an extension. After that, the penalty for not filing your taxes is forfeiture of your tax refund.

If you don’t file and you are getting a refund will receive a letter from the IRS reminding you to file your tax return, especially if W-2 or 1099 forms were reported to the IRS by your employer.  If you owe taxes and don’t file you will get a letter from the IRS reminding you to pay.

To determine if you have to file taxes 3 things are considered:  your filing status, your age and your income.  Once you reach a certain income level, the law requires you to file. Older individuals and blind individuals must determine if they need to file a Form 1040.

Children file when taxes when: they earned income as a salary, wages or tips or earned a taxable scholarship or fellowship grant; or earned income from investment interest or dividends, capital gains, unemployment benefits and some distribution of a trust fund.

For 2011, if you are under 65: single and earned $9,500, head of household and earned $12,200, married filing jointly and earned $19,000, widow/widower and earned $15,300 or married filing separately and earned $3,700, sold your home or are self-employed you have to file taxes. For more information review the 2011 IRS Publication 17.

Here are 3 tips if you can’t pay your taxes:

1. You can setup an installment agreement and pay the amount owed in 3 years. 
2. Request an extension and request the maximum extension time of 6 months.
3. Request an Offer in Compromise.  An offer in compromise allows you to settle your tax debt for less than the full amount if you meet certain requirements.

Here are 4 ways to file your taxes for free:

1. Free Software.  If your adjusted gross income is $57,000 or less you can use free tax software such as:  Turbo Tax, Free TaxAct, Tax Slayer or H&R Block’s Free File.
2. Use Free Forms.  Anyone can use free file fillable forms from freefilefillableforms.com.  The site provides online versions of paper federal tax forms.
3. File Electronically. Efile (electronically) your tax return for free by using direct deposit or pay your taxes online for free.
4. Paper forms.  Use paper tax forms to file your taxes and mail them to the IRS.  The only cost is postage.

 Legal action can be taken against you by the IRS if you owe taxes and don’t pay: it will be reported on your credit report, you can receive a tax lien, garnishment, judgment, lose your property at a tax auction or other means. Therefore, it is best file your taxes every year.