The worst for corporate layoffs in America appear to be over as comparing to the height of the recent financial crisis. Nevertheless, the layoffs still persist and if you suspect your job may be vulnerable to one, below are some tax situations related to layoffs that may affect you.
One of the first actions after getting laid off is applying for unemployment benefits. As cruel as that may be, the IRS considers those benefits an income stream and therefore taxable. At the beginning of a year, you should receive Form 1099-G that will summarize all the unemployment benefits you received and help you file your tax returns.
When applying for benefits, you can predetermine a percentage of them you choose to receive, although this may be a two-edged sword. On one hand they may be your only source of income at the moment and you may need to keep all you receive to meet your continuing financial obligations. On the other hand, not withholding anything from those payments means a higher tax bill in the coming year. In case you decide to set withholdings, fill out Form W-4V Voluntary Withholding Request with the local unemployment office.
Also be aware that any payments you collect at the end of your employment, such as severance package, payment for any unused vacation time or sick time are taxable.
Many laid off individuals decide to go back to school to refresh some critical skills in order to stay competitive. It is also helpful in transitioning to a new job. Costs of courses related to your profession i.e. tuition, books, supplies, etc might be tax deductible.
Any professional services you pay for while prepping to get a new job such as resume writing, coaching, travel expenses to an interview may also be deductible. But if you decide to change a career, you cannot deduct any of the above-mentioned expenses.
Once successful in finding employment, you may need to move. Certain moving expenses associated with a new job can be deducted from your tax obligation. For more, see our post discussing moving expenses that qualify for a tax deduction.
If your income dries up, you may be tempted to access your retirement funds so be prepared to pay taxes on the distributions plus early termination fees (10% if you are younger than 59 ½). There is what’s called Hardship Withdrawal Provision in which case the IRS would not charge you a withdrawal penalty if the funds are earmarked for medical bills, insurance premiums, or to avoid eviction or home foreclosure.
If you have no other choice but to use your 401k founds, the only positive thing may be that due to a lower overall income, you may end up in the lower tax bracket and taxes on distributions from those plans may be relatively lower. This is a delicate issue so plan very carefully and consult an accountant. If you withdraw too much, you may get back to a higher tax bracket. Similarly, if you are laid off early in the year and access those funds and then find an equally well paying job few months later, this can drive your overall taxable annual income for the year.
Last but not least is the issue of filing taxes. It is important to hold on to your last pay stub. This may be your only document when preparing your tax return. Your previous employer may no longer have your updated address or may be out of business. You should try contacting them and request a W-2 but if unsuccessful, filing taxes with the last pay stub is a viable solution.