Losing Your Job Doesn’t Always Mean a Smaller Refund

Job loss brings stress, uncertainty, and financial pressure—but it also affects your tax situation in ways most people don’t expect. The truth is, your refund might go up, down, or disappear completely depending on what type of income you receive, how much tax was withheld, and whether you qualify for new credits as a result of decreased income.

Here’s what really changes when employment stops.

1. Unemployment Benefits Are Taxable Income

Many taxpayers assume unemployment checks are tax-free. They are not.

Unemployment is considered taxable federal income, just like wages. Most states tax it too.

If you don’t request withholding from unemployment payments, you could owe money at tax time.

Options to avoid a surprise bill:

• ask your state to withhold federal tax from benefits
• make quarterly estimated payments
• save a portion of benefits for tax season

2. Lower Income May Increase Certain Credits

Less income doesn’t always mean less refund. In fact, lower income can increase refundable credits, including:

• Earned Income Tax Credit (EITC)
• Additional Child Tax Credit
• Premium Tax Credit (Marketplace insurance)

Millions of taxpayers receive a refund increase after employment loss because their income falls under credit thresholds.

3. Lower Withholding Could Mean a Better Refund

When you’re working, payroll taxes are automatically withheld. Losing your job may leave you with:

• less withholding
• more credits
• more qualifying dependents
• lower AGI

All of these could result in a larger refund at tax time, depending on your family and income situation.

4. Marketplace Health Insurance May Increase Refund Credits

If you lose employer-sponsored health coverage and switch to Marketplace plans, you may qualify for:

• refundable Premium Tax Credits
• advanced APTC subsidies

This often results in larger refunds, especially for families with children.

5. Early Withdrawal From Retirement Can Create a Tax Bill

If you take money out of retirement:

• 401(k)
• IRA
• pension

…you may owe tax and possibly penalties unless an exception applies.

6. Job Search Expenses Are No Longer Deductible

Before 2017, expenses related to job search could be deducted. That deduction has been eliminated under current law, so don’t spend time tracking receipts—those costs are no longer deductible for most taxpayers.

7. Severance Pay Is Fully Taxable

Severance pay counts as taxable wages, just like normal paychecks. If withholding was not enough, you may owe more at tax time.

What To Do If You Lost Your Job This Year

Here are smart immediate steps:

Request withholding from unemployment

Form W-4V lets you request automatic withholding.

Review your family tax credits

Lower income can unlock bigger refund credits.

Check health insurance options

Marketplace insurance could help increase refundable tax credits.

Track any early withdrawals

Plan for tax if you pull funds from retirement.

Losing employment changes your tax situation fast, but it doesn’t always hurt your refund. In many cases, reduced income can unlock bigger refundable credits, especially for families with children.

The bottom line:

• unemployment is taxable
• lower income may mean higher credits
• health insurance options matter
• withholding choices affect taxes

Stay informed and plan ahead now to avoid a surprise tax bill later.