Losing your job is hard enough without having to consider tax planning, but unfortunately, that’s exactly what needs to be done in order to help keep your finances intact.
In fact, any time you encounter a major life change, whether it’s a marriage, divorce, buying a home or starting a business, it’s important to review the tax implications and create the best strategy.
First the bad news: If your final pay check included severance pay and accumulated leave, sick, and vacation pay, it is taxable income. Hopefully, there was enough withholding to countermand the ensuing tax liability.
If you begin collecting unemployment benefits, that is also taxable income. If it makes financial sense, ask for federal income taxes to be withheld from the unemployment checks. If you don’t think you will be on unemployment for very long, or if you will be dipping into a lower tax bracket due to job loss, you may be able to max out the unemployment benefits without increasing your tax liability and having to withhold for it. Simply crunch the numbers to make sure.
If you receive gifts and loans from family and friends to help make ends meet while searching for a new job, this is not taxable income to you. It is generally the giver who may be taxed on the value of the gift if it exceeds the annual gift exclusion of $14,000.
What to Make of CBO's ACA Job Loss Projection
What to Do if You Forgot to Pay Taxes
Cutting Down on Tax Fraud: Understanding the EITC
Do You Need a New Tax Professional?
IRS Penalties: What to Expect
Supreme Court Ruling on Gay Marriage: DOMA a Year Later
Tax Tips for New Parents
The Tax Consequences of Losing Your Job
4 Tips for Reducing Your Taxes in Retirement
However, if you dip into your retirement plan for a cash injection, you will be required to pay taxes on the distribution. If you are under the age of 59 1/2, you may be subject to a 10% early withdrawal penalty as well. If you are completely and totally disabled or use the funds to pay for health insurance premiums while unemployed or are simply rolling over the funds to a new retirement plan, you will not face a penalty. Check with your tax pro or read up on the topic in IRS Publication 575. Ask your plan provider to withhold the income taxes due on funds you withdraw.
If you sell stocks or bonds to supplement your income, you must report the sales on your income tax return and pay capital gains tax on any profit. Remember, you will not be required to pay tax on the full amount of the sale. You are allowed to subtract your cost basis from the sales proceeds and pay taxes on the difference. It’s possible that you will cash out stocks at a loss and therefore enjoy a capital loss on your tax return to defray other income.
Costs you incur in your new job search, such as resume preparation, employment agency fees, travel to and from job interviews are deductible as itemized deductions on Schedule A.
If you find a new job and are required to relocate, your moving expenses may be deductible. Check out IRS Publication 521 to see what is deductible and how to claim the deduction.
If you decide to don the entrepreneurial hat and open your own business, it’s a good idea to meet with a tax professional to form a tax strategy—especially if you’ve never operated a business. Becoming a small business owner completely changes your tax picture and you do not want any unpleasant surprises come next April 15.
If you are paying off a prior year tax liability and losing your job puts you in a position that you cannot keep a roof over your head and continue the monthly IRS payments, call the agency immediately and ask to be deemed currently not collectible. IRS agents are sympathetic and cooperative. They will require a financial analysis to determine your eligibility for this program so be prepared with income and expense data when you place the call.
If you’re wondering if you can now file your 2014 income tax return now and get a refund, the answer is no. First of all, the forms and tax software are not yet available. Congress has not finished changing tax law that may or may not be retroactive to the beginning of the year. W2 forms are issued in January, even if your previous employer has gone bankrupt, they do not have access to the 2014 W2 forms and are not required to send one to you until January 2015. Make sure you keep your previous employer apprised of your current address so that you receive your W2 in a timely manner.
Bonnie Lee is an enrolled agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter and on Facebook.