With corporate downsizing still on the upswing, many unemployed individuals need to tap into savings to meet their monthly expenses while looking for a new job or setting up a consulting practice. Although some people have money invested in a variety of places, it's vital to know which savings one can dip into without incurring penalties, according to the National Association of Enrolled Agents.

"Generally, any distribution from your IRA or qualified retirement plan - such as a 401(k) - that you receive before age 59 1/2 is considered an early distribution," explains Carol Thompson, EA, Chair of NAEA's Public Information Committee. "These early (or premature) distributions are subject to a 10% early withdrawal penalty to the IRS ... plus any state income tax owing."

Enrolled Agents, the only professional tax practitioners licensed by the federal government to represent taxpayers before all administrative levels of the Internal Revenue Service, note some exceptions to these penalties which - in certain, specific circumstances - may affect unemployed individuals:

• Distributions due to total and permanent disability;
• Distributions to pay for health insurance premiums;
• Distributions for deductible medical expenses; and
• Distributions used to cover qualified higher education expenses for the taxpayer, his or her spouse, children or grandchildren. With all of the changes in the tax code, however, it's more important than even to seek qualified help in addressing these complex tax matters ... especially for the unemployed.

"Beware of prohibited transactions," warns Thompson. "You may not borrow from your IRA or use it as security for a loan. The IRS treats that as if the entire amount were distributed to you."

NAEA offers these tax-planning tips for the unemployed:

• Unemployment benefits aren't tax-free-When registering for unemployment benefits, you'll have the option of having income taxes taken out of each check ... a wise tax-planning move, since you don't want to look for ways to pay your April 15 tax bill due to the increased taxes resulting from unemployment benefits received.
• Expenses incurred in finding a job in your current line of work may be deductible-Save receipts from a resume service and business card center for your tax file. Travel, lodging, transportation, and up to 50% of your meal expenses during job-search trip may also qualify for tax deductions. You can also deduct the cost of phone calls ... advertisements ... printing and mailing resumes ... and employment agency and career counseling fees for your job search.

"Be careful, however," Thompson cautions, since job-search costs - which are considered miscellaneous itemized expenses - aren't easy to deduct - and can be deducted only to the extent that they exceed 2% of your adjusted gross income. Moreover, "Whether or not you land the position, you must be looking for a job in your current line of work. You won't get a tax break if you're looking for your first job or if you're switching careers."

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