Tax Answers for Job-Related Situations

August 30, 2013

If you’re struggling with financial troubles, maybe job-related issues, and are wondering about their impact on your tax situation, we can help.

 

I was laid off from my job, and I received a lump-sum severance payout. Is it taxable?

Yes, it is taxable. And to add insult to injury, that lump-sum payment can really impact your taxes in a negative way, especially if received toward the end of the tax year,

A typical severance package includes one week of pay for every year that you worked for your company. Say you got laid off in November, and received 20 weeks of severance pay. That lump-sum will possibly push your taxable income for the year into a higher tax bracket than if you had received the money gradually.

Any payment that you receive for accumulated sick and/or vacation time is also taxable.

If your employer does not withhold estimated taxes from your final payment, you should calculate whether or not you need to make estimated payments, or risk a big bill due, and possibly a fine, when you file in April.

The amount of the severance pay will be included in your W-2 when you receive it from your employer at tax time.

 

I was laid off from my job, and I’m receiving unemployment compensation. Is it taxable?

Yes, unemployment compensation is taxable income. Seems unfair, but that’s the law. You can choose to have 10% withheld for taxes when you first register for your benefits.

If you receive unemployment income for a significant period of time, you should periodically calculate whether or not you are required to file estimated quarterly taxes.

You will receive a 1099-G from your state when tax time comes around, which will show how much you received in unemployment compensation, and whether or not you elected to have any federal tax withheld.

 

What if I have to withdraw from my 401(k) to pay expenses; is that taxable?

Withdrawing from a 401(k) plan to pay ordinary living expenses is, unfortunately, a taxable event, and if you are under 59 ½ years old, it is also an event which triggers an early-withdrawal penalty.

You can withdraw from your 401(k) and spend the money, but then replace the money and roll it over into a qualified IRA, within 60 days, but that is one of the only ways to avoid paying taxes and penalties.

 

Are there any hardship exceptions for withdrawing from 401(k)s or IRAs?

You can avoid owing the penalty if the withdrawn funds are used to pay for medical insurance premiums or medical expenses, but you will still owe the ordinary income tax on the withdrawal.

 

What job-hunting expenses are deductible?

If you are looking for a job, the IRS does help out a bit. Expenses such as fees paid to a placement agency  can be deducted, as can printing and postage costs. If you travel to an interview, or specifically for the purpose of finding a new job, you can also deduct many of those travel expenses.

 

What if I have to move for a new job?

If you move more than 50 miles away from your old home, your moving expenses can be deductible. In addition to the distance requirement, there is a time requirement; you must work at least 39 weeks during the 12 months following the move.

This time requirement ensures that people do not simply move somewhere else and deduct their moving expenses, without the move actually being job-related.

Keep in mind, too, that deducting job-hunting and/or moving expenses will require that you file the “long form” and itemize your deductions, rather than taking the standard deduction when filing your income taxes.

 

What if I still have a job, but I’m making less money?

If your income declines, you may become eligible for tax credits and refunds for which you weren’t previously eligible.

The Earned Income Tax Credit is a refundable credit for eligible taxpayers, and is based on income and family size.

First, you must have Earned Income. This is income that is generated either thru employment or self-employment.  It is not earned income if it is unemployment, retirement or social security compensation, or if it is generated from alimony, child support, or investments.

Secondly, you must meet the income and family size requirements, which range from $13,090 with no qualifying children, to a married couple making $50,270 with three or more qualifying children. The size of the credit depends on the income and family size.

 

Additional Questions

If you have other questions, or require more in-depth explanation for the questions that we have answered here, please do not hesitate to contact our experienced team of tax professionals and make an appointment.