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Five tax tips for when a spouse becomes unemployed

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– Bob D. Scharin is a senior tax analyst for the Tax & Accounting business of Thomson Reuters. The views expressed are his own. –

It’s bad news when a spouse loses his or her job, but the blow can be softened by several smart tax moves.

1. Reduce income tax withholding. With only one wage earner in the family, you can have less income tax withheld from your pay. Before making the change, consider potential increased eligibility for tax deductions and credits that have income phaseouts, as well as the tax effect of any severance payment to your spouse. Also, bear in mind: up to $2,400 of unemployment compensation is tax-free in 2009.

2. Health care flexible spending account (FSA). Generally, you cannot change a health care FSA contributions election mid-year, but your spouse’s employment status sometimes translates to an exception. You’ll need to check rules on this mid-year change with your employer’s plan. If your spouse was making health care FSA contributions at his or her former job, your best bet, if you are permitted, is to opt for a higher contribution rate on your own plan.

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