5 Tax Tips To Consider After Losing Your Job
Imagine that the unthinkable has just happened. After putting in 15 years with the same company, your job position is eliminated and you are let go. For many, this nightmare has become a reality as more and more companies look to cut costs in response to a souring national economy.
When you have just lost your job, taxes are probably the last thing that you want to think about. However, there are some important tax issues that are associated with the loss of a job that you need to know about.
Here are five important tax issues associated with losing your job.
Severance Pay And Unemployment Insurance Payments Are Taxable
If you receive a severance package from your employer, the full amount of the package will be taxed. The same goes for any money that you receive for unused vacation and sick time. You employer is supposed to withhold federal and state taxes from these payments and this should appear on your W-2. However, to avoid getting dinged at tax time, make sure that you confirm that these taxes have been taken out.
Unemployment insurance benefits that you receive from the state are also taxable. However, taxes are not automatically removed from these payments. You can avoid having to worry about this at tax time if you file a petition with your state to request that taxes are taken out before you receive your unemployment check. The appropriate form is called a W-4V.
Distributions From Your Retirement Plan Are Taxable, But Rollovers Are Not
If you decide to take a distribution from your 401k or IRA to help cover your living expenses until you find a new job, the money that you take out will be fully taxed unless you have a Roth 401k or a Roth IRA. Keep in mind that the standard rules about early withdrawals still apply. Expect to pay a 10 percent penalty if you take a distribution before you are 59 ½ years old.
Alternatively, you can roll your 401k from your previous employer into an IRA tax free as long as you don’t take any distributions.
You May Be Able To Deduct Some Of The Expenses Incurred While Looking For A New Job
The IRS will allow you to deduct certain expenses associated with finding a new job. For example, if you pay an employment agency a fee to place you in a new job, you can deduct the cost of that fee. You can do the same for costs associated with resume preparation and travel expenses for job searching and interviews.
Additionally, if you find a new job that requires you to move, you may be able to deduct the moving costs you incur. There are certain requirements pertaining to the distance moved and the timing of the move that you will have to meet in order to qualify for the deduction. You can reference IRS publication 521 for more information about deducting moving expenses.
You May Be Able To Sell Some Investments Without Paying Taxes On The Capital Gains
If you own investments that you want to sell to help cover your living expenses while you are unemployed, you might not have to pay taxes on the money you receive from the sold investment. If your taxable income is less than $34,500 or your joint taxable income is less than $69,000, you will not have to pay taxes on the money you earn from your sold investments.
You May Be Eligible For Certain Tax Credits
If your income drops significantly as a result of your job loss, you may be eligible for certain beneficial tax credits. Some of these include:
- The Earned Income Tax Credit: If your earned income falls below a predetermined amount, you can qualify for the earned income tax credit. This tax credit reduces the amount of taxes that you owe. If the credit is larger than your tax liability, you can receive a refund check from the federal government for the difference. Note that unemployment benefits do not count as part of your earned income so you do not have to include them in your calculation.
- Education Tax Credit: If you think that you need to go back to school to get a new job, you might be able to benefit from education tax credits that will help you reduce your education expenses. Credits such as the American Opportunity Credit and the Lifetime Learning Credit can help to ease the financial burden of college education. Keep in mind that there are income requirements that you must meet in order to benefit from these credits.
Losing your job is tough enough. Don’t make your situation worse by missing out on important tax benefits associated with job loss. Given the current state of the national economy, you will need all the help you can get.