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Tax Consequences of Losing Your Job

by
Marge Cook
on
6/9/2016
Tax Consequences of Losing Your Job

Whether you’ve been part of a layoff, been fired for cause, or have left your job of your own accord, it can have significant consequences on your finances. What most people don’t realize is that it can also bring several tax issues to the foreground.

It is important to be fully aware of both of these to ensure that you are prepared and don’t end up inadvertently costing yourself additional money: there are also some tax write-offs that are available for you to take advantage of. 

Write-Offs and Tax Benefits 

There are certain unavoidable expenses that arise when you leave one job and are looking for another, and many of these can be written off on your income tax return. Most notably, as long as your search is for a new position in the same occupation, you are able to deduct 

  • The costs of preparing a resume, including the services of a professional resume writer, printing and mailing costs.
  • The cost of services such as career counseling, outplacement agency fees and employment agency fees.
  • The cost of traveling incurred while looking for a new job. These can include transportation costs and hotels. Regardless of whether or not the primary reason for travel to the particular area was for job search purposes, any expenses that were specifically geared towards finding new employment can be deducted. 

Additionally, if you find new employment that is out of the immediate area and you need to relocate, under certain circumstances you can deduct the costs of moving. In order to determine whether you qualify for this write-off, calculate the distance that you had to travel between your old home and your old job. 

If the distance from the new job to your old job is at least 50 miles farther and you have to be on the new site for at least 39 weeks of the first year of your new employment, then you can deduct such costs as packing, in-transit storage, moving van, shipping, truck rentals, and insurance. 

One of the concerns of moving from one home to another is the capital gains on the sale of the original home, however if your relocation is due to a new job and the house that you’re selling and leaving was your primary residence for at least two out of the last five years, then up to $250,000 of the gains are able to be excluded – and if you have not lived in the house for that period of time because of the job loss, a prorated gain exclusion is available. For couples who are married and who both qualify for the exclusion, the amount that can be excluded rises to $500,00. 

Other Job Loss Concerns

There are other considerations that you need to keep top of mind when switching jobs or in the face of a job loss. For example, if you apply for unemployment compensation benefits to provide a safety net while you’re looking for a new job, you must remember that those benefits are considered taxable by the government, and by some states as well. Similarly, your severance pay and any additional income that your former employer provides to compensate you for unused vacation or sick time will be taxed and included on your W-2. 

Pension and Retirement Plans

If you are enrolled in a pension plan with your previous employer, you need to determine what to do with your funds. In some cases an employer will permit you to leave things as they are and retain the funds in their plan, and in other cases you may need to move them out. The money can be directly rolled over into your own IRA or you can take a distribution and do it yourself. If you choose the distribution, it is important to remember that the funds must be deposited into a new IRA within 60 days. 

Also, there are specific tax ramifications that may make this a less-than-desirable option. When an employer distributes the money they will only provide you with 80% of the funds, as the government requires them to withhold federal taxes of 20%. This is something of a trap, as unless you are able to make up the funds out of pocket, you will be taxed on the twenty percent that is not rolled into the new account.

It can be tempting to consider simply taking the distribution of your pension account and using it to bridge the gap between jobs, but this is a mistake. Not only is the distribution taxable, but you will also have to pay an early withdrawal penalty of 10% if you are under the age of 59.5.

Rolling the funds into a future employer’s pension plan is often a good idea, and if you believe that you will do that, then be sure to keep the distribution in its own IRA rather than simply adding it to an already existing IRA account: pension and retirement funds need to be kept separate.

Health Insurance

If your employer was providing you with health insurance coverage through their group plan, then you will need to make an immediate decision on what to do about health insurance going forward. Where it may be tempting to simply forego this expense until you have a new job in place, the rules of the Affordable Care Act mean that doing so leaves you open to significant penalties.

You will need to either take advantage of continued coverage through COBRA, buying your own private health insurance, or using the government health insurance Marketplace. 

  • The Marketplace, also referred to as Obamacare, is available outside of the normal enrollment window to families who have lost their already-existing health insurance coverage. Taxpayers who have lost their coverage as a result of a job loss and who are concerned about how to pay for insurance may find themselves able to qualify for the premium tax credit for the specific months when they have no coverage.
  • In the face of a job loss, employees will be provided with information about Cobra coverage. COBRA stands for Consolidated Omnibus Budget Reconciliation Act, a law that makes many companies provide access to continued health insurance coverage to employees, their spouses, former spouses and dependent children. COBRA has the advantage of providing a bridge insurance for a period of 18 months for employees of state and local governments and for private-sector employers with twenty or more employees and who provide group health coverage, but the costs can be prohibitive. The employee is required to pay the employer’s cost of the coverage plus an additional 2%. 

In the face of a job loss, all of these elements and issues require attention and consideration. 

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Marge Cook

Marge Cook

Based in Rhinelander, WI, Marge Cook has been a Tax and Accounting professional for 8 years. She specializes in small businesses and is certified as an Accounting Services Professional, Professional Bookkeeper, Professional Tax Preparer, and a QuickBooks ProAdvisor. Prior to starting Custom Accounting Services, she worked in Management at both McDonalds and Walmart.

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