How To File Your Taxes When You Lose Your Job

If you lost your job this year, having to file a tax return can feel like rubbing salt in the wound — especially if you have been out of work for a prolonged period. However, it’s an unfortunate necessity. 

US News My Money explains what you should know about filing your taxes after you lose your job.

Collect Your Tax Documents

The first step is collecting the necessary paperwork, so you have everything on-hand. These documents include:

 

  • Form W-2: If you worked at any point in the year, you would receive a W-2. This form contains your earnings and taxes withheld by the state and federal government.

 

  • Form 1099-G: If you received unemployment insurance at any point, you would also get a 1099-G from your state labor office. This document tells you how much you received. If you chose to have federal taxes deducted from your payments, this form would also tell you how much was withheld (no more than 10%).

 

  • Form 1099-R: This form is sent to savers who withdrew from their 401(k)s or other retirement vehicles this year. It contains the amount that you removed and the amount deducted for taxes.

 

Report Income Earned From Side Gigs

Did you supplement your income through a side hustle or freelance gig this year? If so, you will need to report your earnings to the federal government by making a Schedule C (for unincorporated businesses trying to generate revenue) or claiming it as “other income.”

“Other income” is any compensation you received that isn’t related to a business. For example, if your friend pays you to edit their book, that falls under “other income.” However, if you are a freelancer who specializes in copyediting and actively seeks work from other clients, you would create a Schedule C.

If you are unemployed, you will also need to determine the interest and dividends earned from stocks, bonds, or other assets you bought or sold throughout the year. This sum counts as taxable income. 

Determine Your Tax Bill

Data from the US Census found that in 2019, the average American made $68,703 annually. If you fall in that range, file jointly with your spouse, have one child and don’t itemize your deductions, you typically owe about $4,400 to the federal government. But with the child tax credit, you can cut your liability by $2,000. 

If you paid no federal taxes this year, you would still owe around $2,400. Whether you owe the government or it owes you comes down to how much taxes you paid this year. Once you prepare your tax return, you will know what to expect.

What Happens If You Owe Taxes?

If you owe federal taxes but can’t afford to pay it before the due date, you still need to file your taxes. If you don’t, the IRS will charge a “failure-to-file” penalty, which adds as much as 25% more to your liability.

But if you request an extension, the IRS will give you to October to pay your bill penalty-free. If your request is permitted and you still don’t file, the IRS will revert the penalty to April. You must complete a tax return for this year — the IRS offers several payment plan options to make it easier, including

 

  • Short-term plans (120 days)
  • Streamlined installment agreements (72 months)

 

The streamlined payment plans apply automatically in most cases and require relatively minimal paperwork. Typically, this plan involves much less documentation for those who owe $50,000 or less in taxes and added charges. It costs $31 to use the IRS online payment portal, but more for phone payments.

If you owe more than $50,000, the process is a little more intensive. The IRS reviews your income, including your assets and annual expenses. Depending on the size of your tax bill, the IRS may give you as many as 84 months to pay it back.

The best way to ensure you don’t get stuck with penalties or unintentionally miss a deadline is by taking care of your taxes early and setting up a payment plan with the IRS. No one wants to do their taxes, especially sooner than they need to. But it’s worth not having to worry.

 

Source
  • Armstrong, Morris. “How to File a Tax Return When You’re Unemployed.” U.S. News & World Report, U.S. News & World Report, 17 Nov. 2020, money.usnews.com/money/blogs/my-money/articles/how-to-file-a-tax-return-when-youre-unemployed.
Ian Schindler