WALTHAM, Mass.- When you lose your job, how does it affect your taxes? Former wage earners who are now job seekers may face confusion as April 15 approaches. What are the questions you should be asking? What are the long-term smart moves?

"One of the big fears of being unemployed is cash flow," says Bill Wiggins, Tax Attorney and Chair of the Financial Planning and Taxation Department at Bentley College in Waltham, Mass. "Mortgage payments continue, grocery and insurance bills are unrelenting. Faced with an urgent need to pay bills, many people cash in a 401K plan, not realizing the double consequences of their action. First, they have to pay a heavy 10% penalty now for taking the cash early, and at the same time reduce the pot from which they can draw upon in retirement, reducing the level of savings that would have grown tax-free. It may be wiser to tap into a line of credit on a home mortgage at a much lower interest rate.

"Another concern is whether to have withholding held when you file for unemployment benefits," notes Wiggins. "Unemployment compensation is considered income and therefore fully taxable. Ask yourself whether in your own case is it better to pay as you go, or pay taxes as a lump sum at the end of the year, when you're likely to be working again."

An important rule of thumb: resist using savings that are tax-advantaged, providing a long-term, tax-free safety net for the future. When the bills are piling up now, that's not easy. But be tough. So says Mark Nixon, PhD, CPA, Associate Professor of Accounting at Bentley College

Nixon and Wiggins are directors of the Bentley Low Income Taxpayer Clinic, which is partially funded through a matching grant provided by the Internal Revenue Service (IRS) but is not affiliated with the IRS or any other government agency.

The Bentley LITC is a free counseling and representation service that assists low income taxpayers in dealing with the IRS for audits and exams, collection issues, appeals and controversies, and tax return preparation for English as a Second Language taxpayers. The Bentley LITC, in Waltham, is one of five such clinics in Massachusetts, and the only one affiliated with a college or university. Information is available online at: http://ecampus.bentley.edu/dept/bslc/blitc or by phone at 781-891-2083.

For certain, many unemployed taxpayers are not low-income earners in the eyes of the IRS. Wiggins and Nixon offer these tips for anyone recently unemployed:

• Conserve cash flow. Look for ways to consolidate bills. You may need the help of a professional, such as a CPA or financial planner, whose expertise can save you money even after you pay their fee.

   

"Even if you're cash poor, seek professional advice. The consequences of bad decisions can really wreak havoc with your finances in the long run. Don't ignore alternative ways to raise money, such as a second mortgage, when you need cash," said Mark Nixon.

• Liquidate present holdings to raise immediate cash. Consider your stocks, investment property, any types of collectibles (art, antiques, stamps, etc.) and sell the item that cost you the most so your capital gains will be the least.

• Gifts of cash from family members are completely tax-free to the recipient but the donor has an annual gift-tax exclusion of around $11,000 per gift per recipient.

"A relative can give approximately $11,000 to the husband and $11,000 to his wife. Keep in mind that the IRS's definition of a gift is one for which the donor expects nothing in return," says Mark Nixon. "That means no part-time clerical services, no babysitting, nothing."

• Keep records. Expenses incurred while job hunting are tax-deductible. That includes phone bills, meals with prospective employers, travel expenses, books or tools such as software for resume-writing.

• Education to maintain or update your existing skills, is tax deductible. Use the time to learn in ways that will help your career. A manager who goes for an MBA or takes continuing education courses in her field is updating skills. However, education to change careers is not tax deductible. For example, an accountant who decides to go to law school can't deduct tuition, even if he plans to become a tax attorney.

• Moving expenses qualify as tax-deductible if your new job requires relocation, regardless of whether you're moving to accept employment or to become self-employed, provided you are self-employed for a minimum of 78 weeks and hold required licenses. But remember self-employment means you are responsible for what both the employer and the employee pays into FICA. It's always an eye-opener, says Nixon.

• Over age 59 ½, you can take money out of retirement funds, such as a 401K, without penalties; at age 62, you should consider drawing on your Social Security benefits

"Bottom line: think long-term, and keep good records," says Mark Nixon. "If you don't keep good records, you're throwing away money. You'll need the paperwork to defend your tax records, and help you make important decisions about the future. Good records can take the guesswork out of decisions you should make."