With the unemployment number rapidly rising in Ohio and across the country, numerous tax benefits have come about to help the unemployed. Many are included in the American Recovery and Reinvestment Act of 2009, while others have been around for some time to help those having financial difficulty.
“These benefits are helping the unemployed by keeping their overall tax bases low,” says Tim Schlotterer, CPA, a director of tax and business advisory services at GBQ Partners LLC. “These incentives are also stimulating the economy to some degree by keeping the tax burden low for these individuals, allowing them to reposition themselves in the economy by finding new jobs.”
Smart Business spoke with Schlotterer about the different tax benefits offered to the unemployed and what employers need to do regarding these benefits.
What tax benefits are in the stimulus act?
The first is the American Opportunity Credit for unemployed individuals who go back to school to learn a new industry or profession. You can receive up to $2,500 per year of credit on qualified education expenses, such as tuition, books or materials. The credit does not cover room and board, and the individual’s adjusted gross income must be under $80,000 if filing as an individual or $160,000 if filing jointly. The credit is also refundable up to 40 percent.
The second piece is unemployment income. In the past, unemployment income was taxable to the individual. For 2009 and 2010, the first $2,400 of unemployment income will be tax exempt. This exclusion only applies to unemployment compensation paid as part of a government program, not for private supplemental plans through an employer or union. Any amount above the $2,400 is subject to tax.
The third is COBRA insurance, which allows unemployed individuals and their families to receive health insurance for up to 18 months after employment is terminated. Before the act, individuals had to pay the full premium, which was generally pretty expensive. With the new act, individuals are only responsible for 35 percent of the premium for up to nine months, and the employer is responsible for the other 65 percent. The employer is then entitled to a payroll tax credit for that 65 percent. Eligible individuals must have been involuntarily terminated from their jobs between Sept. 1, 2008, and Dec. 31, 2009.
The fourth, Earned Income Tax credit, has been around for a while, but it’s typically been earmarked for those with minimal income who have qualifying children. The credit percentage has been increased for 2009 and 2010, from 40 percent to 45 percent of the first $12,570 of earned income.
Finally, the Making Work Pay credit is a refundable credit against income tax of 6.2 percent of earned income, up to a maximum credit of $400 for individuals, or $800 if married. This is only eligible to U.S. citizens, and phased out for individuals with income of $75,000 or higher. Withholding tables have also been adjusted for those who are working and receiving W2 wages.
What benefits are not associated with the act?
If you’re looking for employment in a similar trade or business, you are able to deduct those expenses, including classified advertisements, job hunting Web site registration, agency or recruiter fees, job counseling, resume costs, long-distance phone charges and travel expenses. Any traveling to and from job interviews can also be deducted, as long as you’re looking for a job in the same trade or business. You can also deduct moving expenses if you’re relocating for a new job. The new residence must be at least 50 miles from the former location, and any traveling done to find a new residence can also be deducted.
Unemployed individuals are looking for ways to cover their costs, and probably one of their biggest assets is a 401(k) or retirement account. Typically, if you take money out of these accounts you receive a 10 percent penalty for early withdrawal, but there are some exceptions. If you’re under 59-and-a-half years old, you can work out a scheduled series of periodic payments and not be subject to a penalty. Distributions made to cover medical expenses due to hardships are not penalized, nor are distributions for qualified education expenses. You need to review the rules for hardship and heavy financial need distributions to see what you qualify for.
How do you become educated on these benefits if you’re unemployed?
Work with a CPA or financial adviser to find out what you’re eligible for. You can also find more information at www.irs.gov. The economy is in the deepest recession since World War II, with more than 4 million people unemployed, so it’s important to learn about these items.
What role do employers play in this?
With the COBRA benefit, employers are required to inform employees of the new eligibility requirements. If an employee was terminated between Sept. 1, 2008, and Feb. 17, 2009, employers were required to send letters to terminated employees to inform them of their eligibility for the benefit. Employees receiving the Making Work Pay credit should already be seeing that in their pay stubs. Employers should advise employees to work with their CPAs or financial advisers.
Do you expect to see more benefits as unemployment continues to rise?
I don’t see anything significant coming about at this time. President Obama has come out with some new initiatives to look at the overall tax structure in areas such as personal income tax rates, which may have some benefit.
Tim Schlotterer, CPA, is a director of tax and business advisory services at GBQ Partners LLC. Reach him at (614) 947-5296 or [email protected].
