Unemployment is taxable; taxes and bankruptcy
Many people that I work with have received unemployment insurance at some point in 2012. Since unemployment insurance is often a fraction of what their paycheck was, they often elect not to have taxes withheld from their weekly benefit. As a result, these taxes that are not withheld during the year, are due at tax time in April of the following year. For people that have substantial deductions and/or credits, like home mortgage interest or children-related credits, this may only reduce your refund. For others who do not have these deductions or credits, it may mean that you will owe the state Department of Revenue and the I.R.S. It may be worth exploring the Earned Income Credit or deductions for job search expenses with a tax professional.
For those that have experienced an extended period of unemployment that have resulted in substantial income tax bills, bankruptcy may be alternative. For taxes that are less than three years old, these can be paid back over the course of 36 to 60 months in a Chapter 13 plan. For taxes that are more than three years past due (currently tax year 2007, soon to include tax year 2008), these may be dischargeable without having to make any payments towards the tax debt. Tax issues in bankruptcy are rather complicated, so please contact me if you think bankruptcy may be able to assist you with tax debt.