Losing a job can affect your taxes, with unemployment benefits and severance pay being taxable. Adjusting tax withholding and considering tax-deductible expenses are key during this time.  In this guide, we will cover:

  • Financial impacts of job loss and the resulting tax considerations
  • Key initial tax steps following unemployment
  • Planning for the future while managing current tax implications

Understanding Unemployment Benefits

  • Taxability of Unemployment Compensation
    • Reporting unemployment on federal and state tax returns
  • Withholding Taxes from Unemployment
    • Options for voluntary withholding to avoid a tax bill

Severance Pay and Accrued Leave

  • Tax Treatment of Severance Packages
    • Severance pay, sick leave, and vacation payouts as taxable income
  • Withholding on Severance and Other Payments
    • Ensuring correct withholding to prevent underpayment penalties

Potential Tax Deductions and Credits

  • Deducting Health Insurance Premiums
    • Premiums may be deductible if you itemize and meet certain conditions
  • Retirement Account Contributions
    • Impact of job loss on retirement savings and contributions

Tax Planning and Loss of Income

  • Adjusting Tax Withholding if Gaining New Employment
    • Revising Form W-4 with a new job to avoid over- or under-withholding
  • Managing Taxes on Retirement Plan Distributions
    • Understanding the tax implications of accessing retirement funds early

Final Thoughts

  • Year-end tax planning following a job loss
  • IRS forms and resources for the unemployed
  • The role of a tax professional during the transition period

Detailed Bullet Points for the IRS Sections:

  • IRS References:
    1. Unemployment Compensation: IRS Publication 525
    2. Severance Pay: Typically included in the W-2 Form instructions
    3. Health Insurance Premiums: Deductibility under IRS Topic No. 502
    4. Retirement Account Contributions and Distributions: IRS Publication 590-A and IRS Publication 590-B
    5. Withholding and Estimated Tax: IRS Form W-4 and IRS Form 1040-ES