If you have lost your job, there are a number of tax issues that you may come across. How you deal with these issues can impact both your taxes and your finances. The following are typical issues you could experience, along with their tax treatment:
Tax Issues That Come With Job Loss
Your employer may provide you with severance pay. Severance pay and payment for unused vacation time are included in your W-2 income. This could also applied to other paid time off benefits (also known as PTO). These benefits are all fully taxable.
If you do not find another job right away, you may qualify for unemployment benefits. These benefits are provided for employees who were laid-off. Unemployment benefits are taxable for federal purposes. These benefits may or may not be taxable by your state where you live. Unemployment benefits are taxed in Massachusetts. This benefit is included as Massachusetts gross income in the year the benefit is received.
When you lose your job and you have health insurance through your employer’s group health coverage plan, check with your former employer what your options are. You should be receive information about this when you leave the position. But if not, ask. You will need to decide what your next step is, according to what your options for continuing coverage are. There is the option of COBRA. However, there may be a replacement policy you can opt into. If you give up coverage, you may be subject to Obamacare penalties. Be certain you are insured. Guard yourself against these penalties.
The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires continuation coverage to be offered. COBRA covers employees, their spouses, former spouses, and dependent children when employer group health coverage is lost. This continuation coverage is often more expensive than the amount that active employees paid for group health coverage. Why? The employer usually pays part of the cost of employees’ coverage. And, if that is not enough, a charge of 102% it is billed back to the former employee. You ask why again? Because of administration costs. That’s right, you lost your job; now you have to pay for the company to administer the plan. COBRA generally applies to private-sector employers with 20 or more employees. It also applies to state or local governments that offer group health coverage to their employees. In most cases, COBRA time limit is up to 18 months.
Obamacare (Affordable Care Act)
When health coverage is lost, your family may enroll in Obamacare. Obamacare is offered through a government Health Insurance Marketplace outside of the normal enrollment time. Massachusetts has its own mandate for coverage as well, known as the Health Connector. In addition, depending upon your income for the year, you may qualify for the premium tax credit. This credit can be for the part of the year when you don’t have coverage through your employer. This can help pay for your health insurance.
Employer Pension Plan (EPP)
Next, once you’ve lost your job, find out if you have an employer pension plan? You may be able to leave your retirement funds in the employer’s plan. Also, you may have the option of moving the funds to your IRA account. Finally, you can have the funds transferred to your IRA or take a distribution and roll it into your IRA within 60 days. However, this is where a tax trap exists.
aIf you take a distribution, the employer must withhold 20% for federal taxes. This means only 80% of the funds will be available to roll over. The remaining 20% will be taxed unless you can make up the difference with other funds.
In the event you should ever want to roll those funds into a new employer’s retirement plan, those retirement distributions should not be mixed with other IRA accounts. If you are tempted not to roll the funds over, beware! The distribution will generally be taxable. And, if you are under the age of 59.5 there will also be a 10% early withdrawal penalty. That is a raw deal, but it is what it is.
Job Search Expenses
Expenses incurred while looking for a new job in your current occupation are deductible. This is true even if the new employer doesn’t hire you. Examples of eligible expenses include:
Employment or Outplacement Agency Fees: These fees are paid to a third party who may help you find a job.
Career Counseling: A tax deductible expense is career counseling. Those whom you hire to guide you through the process of securing a position with another employer.
Resume preparation costs: These costs can include typing, printing and mailing.
Travel and Transportation Expenses: This is if the trip is primarily to look for a new job. However, even if the travel expenses to an area aren’t deductible, because job search wasn’t your primary reason for the trip, the expenses of looking for work in the area are allowed.
Moving Expenses: If you end up moving to obtain employment, you may qualify to deduct your moving costs. These moving expenses generally include shipping, moving van, truck rentals, packing, insurance and in-transit storage. To qualify, the distance from your former home to your new work site must be at least 50 miles further than the distance from your old home to your old job. Also, you must work in the new location for 39 of the first 52 weeks in the new location. You can read more about moving deductions for tax purposes here.
Home Sale: If you relocate and have to sell your home, you may be able to claim the expenses on your taxe returns. If you own and occupy the home as your primary residence for 2 of the previous 5 years, you will be able to exclude up to $250,000 of the gain ($500,000 if you are married and both you and your spouse qualify for the exclusion). If you do not meet the 2-out-of-5-years qualifications because you have lost your job, you will be allowed a prorated gain exclusion. This means it will be calculated. Don’t worry, Worthtax tax can help you with that.
Have you lost your job?
First, we can say that when you have lost your job, we understand that it is a very emotional and difficult experience. As you can see, there are a number of issues that may apply when a job loss happens. If these issues apply to you, please feel free to give Alex Franch, BS EA at 781.849.7200. Alex can schedule an appointment and help you to figure out how the rules that apply to your tax situation. He will also advise you on what actions you can take to minimize tax liability and maximize tax benefits.
Sources and Resources Regarding Job Loss
- Moving Deductions
- 5 Accounting Tips That Will Make Managing Your Small Business a Breeze
- Health Reimbursement Plans: Beware of Penalties
- Health Insurance Marketplace
- Massachusetts Health Connector