Losing Your Job and Taxes

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By Alan Kalman, AARP

A significant number of individuals have lost their job over the last few years. Some of you will lose your jobs over the next few years. In a two-part series, I will discuss the tax consequences of losing one’s job  (Part I) and the tax deductions that may be available to you when you attempt to find a new job (Part II).

Part I: Tax Consequences of Job Loss

Even with the loss of your job, taxes do not go away. Your employer may provide you with severance pay or accrued vacation or sick pay. These payments are all taxable compensation.[1] If you qualify for and receive unemployment compensation benefits, these payments are also taxable. You will need to ensure that adequate state and federal income taxes are withheld from these payments. A large severance check could easily bump you into a larger tax bracket.

If you have to tap into your retirement account (IRA, 401(k), 403(b), federal TSP, etc.), these distributions will be fully or partially taxable. The plan administrator will withhold taxes but you must ensure that the amount is adequate. In addition, if you have not reached age 59 ½ (age 55 or 50 in certain circumstances) the taxable distribution will be subject to a 10% early withdrawal penalty unless you meet one of the exceptions.

Some of you may have to sell some of your stocks or bonds or other securities in your non-retirement investment accounts. Any gain on the sale of those assets is a taxable capital gain. However, you may be able to offset those gains with other capital losses. If your capital losses exceed your capital gains, you will be limited to a maximum loss of $3,000 on your tax return. Any excess capital loss may be carried forward to the next tax year.

Some of you will receive help or aid from third parties such as charities, friends and family. These payments are gifts and are not taxable income. Additionally, any public assistance you receive is also not taxable income.

Due to the loss or lowering of income, the lower adjusted gross income (AGI) may now make you eligible for certain tax benefits or for a larger benefit. Among these are the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit, Retirement Savings Contribution Credit, and any of the higher education tax credits or deductions.

Lastly, if you are an owner of real property, many states have property tax abatement or postponement programs for low income or unemployed individuals.

AARP Foundation Tax-Aide’s 35,000 volunteers are ready to start serving taxpayers. With over 5000 locations nationwide, the AARP Foundation Tax-Aide program is prepared to assist millions of low to moderate income taxpayers of all ages with special attention to those aged 60 and older. Visit www.aarp.org/findtaxhelp or call 866-623-1115 to get FREE help with your taxes.