Six Tips for Unemployed Taxpayers

If you have, unfortunately, joined the many individuals who are unemployed due to the current economic downturn, there are a number of tax provisions available in 2009 that you may find helpful in weathering a difficult period.

Unemployment Compensation – Partially Tax-Free – Although some states don’t tax unemployment compensation, it is taxable income for federal purposes. However, for 2009, there is no federal income tax on the first $2,400 of unemployment benefits; the balance is taxable. For a married couple, the exclusion applies to each spouse individually. Thus, if both spouses receive unemployment benefits during 2009, each may exclude from income the first $2,400 of benefits he or she receives.

COBRA Continuation Premium Subsidy – If you were eligible for COBRA medical insurance continuation with your prior employer between September 1, 2008 and December 31, 2009, you are probably qualified for the tax-free premium subsidy equal to 65% of the cost of the insurance for a period of up to nine months. The former employer pays the subsidy but is reimbursed by the government. This benefit is not available if your adjusted gross income for the year is over $145,000 ($290,000 married joint filers). If you think you might qualify, contact your former employer.

Costs of Seeking New Employment – The costs incurred while seeking new employment are generally deductible as a miscellaneous itemized deduction. These include the cost of preparing, reproducing and mailing resumes; employment agency fees; travel expenses including auto travel at 55¢ per mile, airfare, out-of-town lodging and 50% of meals; long distance telephone charges; etc. The expenses must be for searching for a new job in the same field as was your previous employment.

Certain Penalty-Free Pension Withdrawals Permitted – Although all pension withdrawals are generally taxable, the early withdrawal penalties can be avoided when the withdrawals are to pay:

• Unreimbursed Medical Expenses – Amounts you withdraw from any qualified plan to pay unreimbursed medical expenses that would be deductible on Schedule A during the year and that exceed 7.5% of the taxpayer’s AGI are exempt from penalty. This is true even if you don’t itemize your deductions.

• Medical Insurance – This exception allows you, if qualified, to make penalty-free withdrawals from your IRA to pay for medical insurance for yourself, your spouse and dependents. To qualify for this exception, you or your spouse must have lost your job; received unemployment compensation for 12 consecutive weeks; made withdrawals during the year the unemployment was received or in the following year; and made the withdrawals no later than 60 days after being re-employed.

• Higher Education Expenses – Withdrawals made from an IRA during the year for qualified higher education expenses for yourself, spouse, children or grandchildren are exempt from the early withdrawal penalty.

Home Sale Exclusion – Generally, to qualify for exclusion of gain, a taxpayer must own and use the home as his or her primary residence for two of the prior five years. However, where you are forced to sell the home because of a job-related move, you can no longer afford to maintain it, or you are eligible for unemployment benefits, you can qualify for a partial prorated exclusion without meeting the two-year qualification period.

Gifts – If you are receiving assistance from a family member in the form of a gift, you should be aware that the gift is not taxable income to you, nor is it deductible by your benefactor. However, the person making the gift may need to file a Gift Tax Return, if he or she gives you more than $13,000 during 2009. The giver can gain some tax benefit by gifting appreciated property, thereby transferring the tax liability for the gain to you at—hopefully—a lower tax rate. For example, a parent makes a gift to his child of appreciated stock. If the parent sells the stock and gives the child the cash, the parent must also pay the income tax on the gain. On the other hand, if the parent gives the stock to the child, who then sells it, the child will be taxed on the gain. Call this office if you are considering such a strategy.

If you would like to discuss any of the tax provisions mentioned here, please contact this office for an appointment.

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