Events In Life That Have A Significant Tax Impact Series: Losing Your Job
When you lose your job, you have a lot on your mind and your taxes may be the last thing you are thinking about. However, losing your job can have a significant impact on your tax return. You need to be aware of the tax consequences to avoid costing yourself money and be able to take advantage of potential tax benefits. Below are a few of the tax consequences and benefits you should be aware of.
• Your state unemployment insurance benefits (up to 26 weeks) and your extended benefits (up to an additional 13 weeks) are taxable. When you apply for unemployment, you may choose to have 10% withheld for federal taxes by completing Form W-4V, Voluntary Withholding Request.
o The State will provide you with a Form 1099-G prior to January 31st of each year, showing the amount of taxable benefits paid in the prior year.
Severance Pay, Accumulated Vacation Time Or Sick Pay Is Taxable
Payments for any severance pay, accumulated vacation or sick time are taxable. Taxes will be withheld at the same rate as it was from your salary while you were working. You should ensure that enough taxes are withheld from these payments, or make estimated payments.
• Severance pay becomes taxable income for the year you receive it. If your severance pay is large compared to your yearly salary, this could bump you into a higher tax bracket.
o If you are bumped into a higher tax bracket, you can try and negotiate to have your severance pay paid out over time rather than in one lump sum.
Withdrawals From Your Pension May Be Taxable
Try and avoid taking money out of your IRA or 401K. Generally speaking, if you withdraw the funds before you reach eligible age, and do not roll it over into another qualified retirement plan or Individual Retirement Account (IRA) within 60 days, that amount will be taxable income in the year in which it is withdrawn. If you are under age 59 1⁄2, an additional early withdrawal penalty of 10% tax may apply on those early distributions.
Potential Tax Benefits Job Search Expenses May Be Tax Deductible Certain expenses incurred while looking for a new job may be deductible. Examples of deductible expenses include employment and outplacement agency fees, resume preparation, and travel expenses for job search and interviews.
Moving Costs Due to Change In Job Location May Be Deductible Moving costs you incur because of a change in your job location may be deductible. How far you moved and the amount of time you spend on the job will have a major impact on whether you qualify for the tax break. If you can meet certain criteria relating to distance moved and timing of the move, then job-related moving expenses that you incur may be tax deductible.
• You will meet the distance test if your new workplace is at least 50 miles further from your former home than your previous workplace was from that home.
• The time test requires you work full-time for at least 39 weeks during the 12 months immediately after your move. If you are self-employed, the time test requires you to work full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after your move. You can deduct your moving expenses on your tax return even though you have not met the time test by the date your return is due, if you expect to meet the 39-week or the 78-week test as required.
• Members of the armed forces do not have to meet these tests if the move was due to a permanent change of station.
• Reasonable moving expenses are deductible and include the costs of moving your household goods and personal effects to your new home. You can also deduct the expenses of traveling to your new home, including lodging costs.