Taxes are tough surprise for jobless

March 6, 2012 10:41 am

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As if being unemployed were not bad enough, many people who were out of work for all or part of 2011 are discovering they may face even more challenges when it comes to filing an annual tax return.

"I've seen a couple of people who were pretty surprised to find their unemployment compensation benefits were taxable," said Howard Davis, president of the accounting firm Davis, Davis & Associates, Downtown.

"I tell them don't get mad at me. I'm just the messenger."

When laid-off workers first file unemployment claims with their state's Department of Labor, they can choose to have a percentage of the check withheld to cover federal taxes. But in order to receive as much cash as possible to meet immediate needs in a difficult time, many opt for no withholding.

"That's the majority rule," said Mark Steber, chief tax officer for Jackson Hewitt Tax Service in Parsippany, N.J. "I have seen some people opt for withholding, but it's clearly the smaller number of people receiving unemployment."

The Internal Revenue Service counts unemployment compensation in a citizen's taxable gross income. Some states also include unemployment in the income tax calculation. Pennsylvania does not.

In mid-January, the U.S. Bureau of Labor Statistics reported the unemployment rate fell to 8.3 percent, which translates to 12.8 million Americans without jobs.

With tax season in full swing, millions who joined the ranks of the unemployed last year are starting to crunch their own numbers for their filings. It turns out there are both tax burdens and tax breaks that come with being out of work.

A provision in the tax code allows itemized deductions for expenses incurred while job hunting.

"Unemployed people may have the opportunity to take some itemized deductions they wouldn't normally have," said Joe Cain, a tax adviser at Alpern Rosenthal, Downtown. "Depending on the situation, you may potentially even be in a lower tax bracket because of losing your job."

Another tax burden that unemployed workers are facing more frequently stems from taxes and penalties caused by early withdrawals from company 401(k)s, 403(b)s and individual retirement accounts.

"In many cases, individuals have to withdraw from their retirement plans, but they need to be aware that there are tax implications," Mr. Steber said.

Early withdrawals from qualified retirement accounts are taxed at the account owner's ordinary tax rate. If he or she is under the age of 59 1/2, Uncle Sam will exact a 10 percent penalty.

Tim Grant: tgrant@post-gazette.com or 412-263-1591.
First Published 2012-03-05 23:15:38

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