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Tax Tips for the Recently Unemployed
March 26, 2002
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:
"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.
"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."
"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."
BENTLEY UNIVERSITY is one of the nation’s leading business schools, dedicated to preparing a new kind of business leader – one with the deep technical skills, broad global perspective, and high ethical standards required to make a difference in an ever-changing world. Our rich, diverse arts and sciences program, combined with an advanced business curriculum, prepares informed professionals who make an impact in their chosen fields. Located on a classic New England campus minutes from Boston, Bentley is a dynamic community of leaders, scholars and creative thinkers. The Graduate School emphasizes the impact of technology on business practice, in offerings that include MBA and Master of Science programs, PhD programs in accountancy and in business, and customized executive education programs. The university enrolls approximately 4,100 full-time undergraduate, 140 adult part-time undergraduate, 1,430 graduate, and 43 doctoral students. Bentley is accredited by the New England Association of Schools and Colleges; AACSB International – The Association to Advance Collegiate Schools of Business; and the European Quality Improvement System, which benchmarks quality in management and business education. For more information, please visit www.bentley.edu.
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