What if I owe taxes but I'm unemployed? Tips for filers who recently lost a job

 

You lost your job in 2023. And now, to add insult to injury, you have to file a tax return to report all the income you didn’t earn.

After a job loss, oddly enough, a 1040 form can be your friend. In all likelihood, you already paid taxes on the money you earned in your ex-job. Now, you could be looking at a sweet refund check and some timely tax breaks.

Here are eight tax tips for the newly jobless.

Don’t forget to file

This might sound pretty basic, but losing your job doesn’t mean you don’t have to file a tax return.

If you lost your job in 2023, TurboTax instructs, you’ll still need to file a return in 2024 if your income exceeds $13,850 (for a single filer under 65), or $27,700 (for a joint filer under 65).

File early

If you lost your job in 2023, you have every reason to file your taxes early.

There’s no special tax credit or deduction for losing your job, Jackson Hewitt reports.

Nonetheless, the jobless tend to sink into lower tax brackets, meaning that your income will be taxed at a lower overall rate. What’s more, the taxes withheld from your paychecks may be more than enough to cover your tax liability. Those factors point to a likely refund, which you’ll want to get your hands on, because, again, you are jobless.

Look for tax credits

Losing your job means lowering your income, which could put you in line for any of several potential tax credits:

Earned Income Tax Credit. This credit helps low- and middle-income taxpayers lower their taxes. Check with the IRS to see if you qualify.

Child Tax Credit. This tax break kicks in for taxpayers with incomes up to $200,000 (or twice that, for joint filers). A job loss could mean a larger credit.

Child and Dependent Care Credit. This credit, too, is partly income-based.

Beware of large severance packages

Severance pay – including compensation for all that sick time you never took -- is taxable, and it will show up on the W-2 form from your former employer.

Be careful about withdrawing retirement funds

If a job loss leaves you flat-footed, you may be tempted to raid your 401(k) or IRA for fast cash.

Be aware, though, that if you are under age 59 1/2, you’ll generally pay income tax on that money and an additional 10% penalty for early withdrawal, Jackson Hewitt advises.

There are hardship exemptions to those early distribution penalties for the newly jobless, the IRS reports.

Report your unemployment compensation

If you lost your job and went on unemployment, you should soon receive Form 1099-G, which will tell you how much compensation you received. Unemployment compensation is taxable, and you will need to report it on your return.

Read up on self-employment taxes

If you lost your job in 2023 and picked up some freelance work while you searched for a new one, you may need to pay self-employment tax.

Self-employment tax applies to anyone who earns more than $400 a year through freelancing, independent contracting, or other forms of self-employment, NerdWallet reports.

The self-employment tax rate is 15.3% for 2023 and 2024. It applies to your net earnings: the profit, essentially, from your home business.

If you can’t pay your taxes, seek help

The IRS urges taxpayers to contact the agency as soon as possible if they owe taxes after a job loss and cannot pay them. The IRS offers various payment plans.

“Communication is the key to minimizing problems,” the agency says.