How Loss of Employment Could Effect your Taxes

The Internal Revenue Service recognizes that the loss of a job may create new tax issues. The IRS provides the following information to assist displaced workers.

Severance pay and unemployment compensation are taxable. Payments for any accumulated vacation or sick time are also taxable. You should ensure that enough taxes are withheld from these payments or make estimated payments.

Generally, withdrawals from your pension plan are taxable unless they are transferred to a qualified plan (such as an IRA). If you are under age 59 1⁄2, an additional tax may apply to the taxable portion of your pension. See IRS Publication 575, Pension and Annuity Income, for more information.

• 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 you incur because of a change in your job location may be deductible. You must meet certain criteria relating to the distance moved and the timing of the move.

• Some displaced workers may decide to start their own business. The IRS provides information and classes for new business owners.

Important Note about Health Insurance Coverage. If you, your spouse, or your dependents enrolled in health insurance coverage through the Health Insurance Marketplace and you have a change in circumstances such as a change in income, let the Marketplace know about it. Certain changes in circumstances – like loss of a job or employer-provided health insurance coverage – may also open the door for a Marketplace special enrollment period allowing you to make changes in your health care plan when it’s not open season. Reporting changes will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little assistance in advance.

After I Lost My Job What Income Is Taxable?

Severance Pay – Severance pay is taxable in the year that you receive it. Your employer will include this amount on your Form W-2 and will withhold appropriate federal and state taxes.

Accumulated Leave or Vacation Pay and Sick Pay – Yes, annual, or vacation pay and sick pay are calculated as wages by your employer and will be included in your Form W-2.

Unemployment Compensation -Yes, your state unemployment insurance benefits (up to 26 weeks) and your extended benefits (up to an additional 13 weeks) are taxable. You may choose to have 10% withheld for federal taxes by completing Form W-4V. The State will provide you with a Form 1099-G prior to January 31st of each year, show the number of taxable benefits paid in the prior year.

Gifts of Cash and Property from Family or Friends – Generally, the person who receives the gift is not liable for any taxes on the gift. If the gift produces income like interest, dividends or rent payments, the receiver would be responsible for taxes on that produced income. Each year there is a specific maximum amount that may be given that will not create a taxable event to either the giver or the receiver. Gifts in excess of this maximum may be subject to gift taxes by the gift giver.

Sale of assets like stocks, bonds, and investment property – sales of such assets should be reported to the Internal Revenue Service. If you have a gain on the sale, it may generate an income tax liability. You should review your overall tax situation and make sure you have paid your taxes as required to avoid an estimated tax penalty.

What can I do if I owe taxes and cannot pay them?

Contact the Internal Revenue Service as soon as possible to request a payment plan. Communication is the key to minimizing problems. Go to www.irs.gov for more information on payment methods and balance due payment options or you can call the IRS at 1-800-829-1040.

IRS offers special assistance on unresolved tax matters that create hardships?

If you are experiencing economic harm, a systemic problem or are seeking help in resolving tax problems that have not been resolved through normal channels, you may be eligible for Taxpayer Advocate Services (TAS) assistance. You can reach TAS by calling toll-free 1-877-777-4778