5 tax tips you need to know if you were unemployed last year
If you were unemployed or worked part-time at any point in 2016, don’t file your taxes without reading this first.
If you’re employed full time for an entire calendar year, your taxes are usually pretty simple. You get a W-2 and boom, your taxes are almost done. But if you’ve been laid off, worked part-time or had any other freelance-type situation, that’s when things start to get complicated.
The good news? “There are some nice benefits in the tax code for people who were unemployed or worked part time,” says Mark Steber, chief tax officer at Jackson Hewitt. Unfortunately, “the tax system can be a complex myriad of rules for tax breaks and credits,” he says.
Monster asked tax experts for advice to help you simplify your taxes, even if your 2016 job situation was more than a little complicated.
Find out if you qualify for the earned income tax credit
Last year, more than 27 million eligible workers and families received more than $67 billion in earned income tax credits (EITC), with an average credit of $2,455, the IRS reports. Still, “many people just don’t take the credit because they don’t know about it,” says Lisa Greene-Lewis, tax expert at TurboTax.
So how do you know if you qualify? If you were unemployed for all of 2016, you’re not eligible because EITC was designed to help low to moderate earners keep more of their income. But if you worked part-time or did some freelance work, you may be able to receive a credit ranging from $506 if you have no qualifying children up to $6,269 if you have three or more qualifying children.
Qualifying income ranges between $14,880 and $53,505 for 2016, depending on filing status (i.e., single or married) and number of qualifying children. One note: unemployment benefits do not count toward EITC eligibility.
Take advantage of job-seeker tax breaks
You can deduct for job-search expenses—everything from referral fees and resume costs to travel associated with your job search and relocation costs—if you meet certain requirements. To start with, you must be looking for a job within your current profession, says Steber. (Switching professions makes you ineligible for job-search deductions.) First-time job seekers aren’t eligible for the deduction either, says Steve Albert, director of tax services at Baltimore–based wealth management firm Glass Jacobson.
The IRS website also says that “you cannot deduct your job search expenses if there was a substantial break between the end of your last job and the time you begin looking for a new one.” Although the IRS doesn’t define what a “substantial break” is, Alison Flores, principal tax research analyst at The Tax Institute at H&R Block, suggests that less than a year would probably not be considered substantial.
Look into a home office deduction
If you worked as a freelancer or paid contractor from your home, you may qualify for a home office deduction. The IRS will let you deduct mortgage interest, insurance, utilities, maintenance and cleaning, repairs, and depreciation if you have a space in your house that’s devoted exclusively to business use.
How much money you can deduct depends on the size of the office relative to the overall square footage of the home. For example, if your home office space is 15% of the total square footage of your house, you can likely deduct 15% of utilities, insurance, property taxes, et al., from your income.
Don’t feel like calculating these expenses? The IRS offers an optional safe harbor home office deduction of up to $1,500, based on $5 per square foot of home exclusively used for business (maximum 300 square feet). If you take the safe harbor option, however, you cannot deduct for home depreciation. “Taking the simplified deduction might not save you as much money but you at least avoid the hassle of record keeping,” says Flores.
Report all sources of income
Any client who paid you more than $600 last year is obligated to send a 1099-MISC form to both you and the IRS. But if you earned less than $600, that income is still taxable regardless of what method you were paid—check, cash, direct deposit, Pay Pal, or barter.
Translation: “Everything is taxable unless it is specifically excluded under the tax code,” says Steber.
So whether you made $40 cat-sitting or $4,000 freelancing, try to remember every paying gig you had in 2016. “If you understate your ‘gross income,’ the government can throw you in jail,” Albert warns. In other words, report everything you earned—every last dollar. “This is not a time to cut corners,” says Albert.
File your taxes—even if you didn’t work a day in 2016
“There are a lot of people who believe that because they didn’t work last year, they don’t have to file taxes,” says Flores. But that’s a common misconception.
“If you collected unemployment benefits, the IRS still considers it taxable income,” Flores explains.
If you were unemployed for all or part of 2016, you’ll receive a Form 1099-G that spells out how much unemployment you need to report on your tax return. What you owe will depend on whether you opted to have taxes withheld from your unemployment benefits.
Most people choose to receive their full unemployment benefits upfront, which makes sense: when you’re out of work, you need the money—especially if you’ve depleted your savings. However, “if you opted to have taxes withheld, it could offset what you owe, or you could qualify for a tax refund,” says Albert.