How Job Loss Can Affect Your Income TaxesPublished:
How does losing your job affect your income tax? The first and most obvious answer is that, unless you obtain a new job or source of income shortly thereafter, your gross income and taxable income will be less. Additionally, you may now qualify for the Earned Income Tax Credit provided that your annual income does not exceed qualifying amounts. [See related article ‘The Earned Income Tax Credit (EITC)’]
Depending on your position, salary, years with the company, you may or may not receive a severance package. The monies received in a severance package are subject to federal income tax. Additionally, any unemployment payments received are subject to income tax. In 2009, however, a qualifying taxpayer was allowed to exempt up to $2,400 in unemployment compensation from their taxable income, yielding some income tax relief in these trying economic times.
When it comes to Uncle Sam claiming his due, it doesn’t stop there. If you’ve accumulated any sick time or vacation time that was paid to you at your discharge of employment, this is also subject to federal income tax.
While looking for alternate employment, keep in mind that expenses incurred in trying to secure employment can be tax-deductible. These would include any fees paid to agencies or employment firms that locate a new position for you, expenses for resume creation, expenses for travel to job interviews, or traveling to search for possible employment. Additionally, any costs associated with having to relocate to secure a new job may be deductible in your income tax return, depending on the distance and the timing of the relocation ? see IRS Publication 521 for conditions & restrictions.
Additionally, if your spouse is employed, they may now qualify as ‘head of household’ and their annual income would be the basis for calculation of standardized deductions for income tax purposes.
Note, too, that if you are qualified to receive subsidies in the form of Public Assistance or Food Stamps, the amount received is not subject to federal income tax.
Should you find yourself having to tap into your retirement or 401(k) plan to pay your mortgage loan or auto loan, be aware that early withdrawal of these funds (prior to age 59.5) are subject to penalties (10%) and federal income taxes. To access funds for your mortgage payments or other emergencies and avoid the 10% penalty, the withdrawal must be in the form of a Hardship ? and must have documentation proving the hardship (such as foreclosure, eviction, or medical expenses). The federal income taxes will still need to be paid but the 10% early withdrawal penalty will be negated.