Tax Complications When Losing Your Job

No one wants to be unemployed. It’s stressful and life feels uncertain. Everything from buying groceries to paying your mortgage is nerve-racking. On top of that, there are a number of tax issues that may impact your unemployment, taxes, and finances.

Severance Pay:

Severance pay is the silver lining to unemployment. It bolsters your savings and helps you get through unemployment. But, your severance pay and payment for unused vacation days are still taxed and will be included in your Form W-2.

Unemployment Compensation:

Like severance pay, unemployment compensation can help you survive until you get another job. Unfortunately, unemployment compensation is taxed by both the federal government and New York State. When applying for unemployment compensation, consider having a portion of it withheld for the taxes you will owe.

Read this NYS Department of Labor FAQ for more info on Unemployment.

Heath Insurance:

Health insurance is one of the most common employee benefits offered by employers. When you’re unemployed, you need to review all your available health insurance options for continued coverage including COBRA or a replacement Health Plan Marketplace policy. If you don’t have health coverage, you may be subject to penalties on your tax return.

  • COBRA Coverage:
    The Consolidated Omnibus Budget Reconciliation Act (COBRA) requires continuing coverage be offered to certain employees and their families when health insurance would otherwise be lost. COBRA insurance often costs more than a similar employer health insurance plan because it isn’t subsidized by the employer. COBRA generally applies to private-sector employers with 20 or more employees and state or local governments that offer group health coverage to their employees. In most cases COBRA coverage is limited to 18 months.
  • Health Plan Marketplace Coverage:
    After losing employer health coverage, a family may enroll in a new plan through the Health Plan Marketplace regardless of the typical enrollment window. Depending on your annual income, you may qualify for the Premium Tax Credit for the portion of the year which you were covered by Marketplace coverage.

Get NYS Health Plan Marketplace Coverage here.

Employer Pension Plan:

Every employer retirement plan is different. Some plans allow you to leave your retirement funds in your old employer’s plan. Other plans require you to roll your funds into another account (such as an IRA).

When rolling over your retirement funds, request a trustee-to-trustee transfer, when possible. Trustee to trustee transfers are direct transfers done by the trustees without your assistance. If you cannot transfer funds with a trustee-to-trustee transfer, a direct rollover is your next best option. In a direct rollover, your old employer’s retirement plan will send you a check that is made payable to your new retirement account. When you get this check, you must deposit it into your new account within 60 days.

While there is a third options, called a 60-day rollover, for transferring funds from one retirement account to another, it is not a good fit for someone that is recently unemployed. When transferring funds with a 60-day rollover, your old employer retirement plan will withhold 20% of your account value for taxes, cut you a check for the other 80%, and then it is your responsibility to deposit these funds into a retirement account. On top of depositing the 80% into a new account, you will have to make up the 20% with your own funds or the 20% will be taxed and penalized.

If you decide to take a distribution instead of transferring your retirement account, the distributions will be taxable and subject to a 10% early withdrawal penalty.

Please discuss any retirement fund transfers with your financial advisor or retirement advisor. If you don’t have one, I can recommend a few that can help you safely navigate retirement-related tax traps.

Job Search Expenses:

When you’re looking for a new job, some of the expenses may be deductible. To deduct job search expenses, you have to be looking for a job in your current occupation and you must itemize your deductions.

Some eligible expenses include:

  • Resume costs, including preparation and mailing
  • The cost of a placement agency
  • Travel and transportation expenses, if the trip is to look for a new job.

Moving Expenses:

If you move for a new job, the related moving expenses may be deductible. To qualify, the distance from your former house to your new job has to be 50 miles further than the distance from your former house to your old job and you must work in the new location for 39 weeks out of the first year.

Home Sale:

If you sell your house that you owned and occupied as a primary residence for 2 of the previous 5 years, you can exclude up to $250,000 of the capital gain ($500,000 if you’re married and both spouses qualify). If you don’t meet the 2 year requirement, you can prorate the exclusion.

There are a lot of tax issues involved in unemployment. To further discuss the tax consequences of unemployment, please reach out.

Phone: (631) 624-0515
Email: [email protected]