The Tax Consequences of Losing Your Job

Bonnie Lee for Fox Business writes:  Losing your job is hard enough without having to consider tax planning, but unfortunately, that’s exactly what needs to be done in order to help keep your finances intact.

In fact, any time you encounter a major life change, whether it’s a marriage, divorce, buying a home or starting a business, it’s important to review the tax implications and create the best strategy.

First the bad news: If your final pay check included severance pay and accumulated leave, sick, and vacation pay, it is taxable income. Hopefully, there was enough withholding to countermand the ensuing tax liability.

If you begin collecting unemployment benefits, that is also taxable income. If it makes financial sense, ask for federal income taxes to be withheld from the unemployment checks. If you don’t think you will be on unemployment for very long, or if you will be dipping into a lower tax bracket due to job loss, you may be able to max out the unemployment benefits without increasing your tax liability and having to withhold for it. Simply crunch the numbers to make sure.

If you receive gifts and loans from family and friends to help make ends meet while searching for a new job, this is not taxable income to you. It is generally the giver who may be taxed on the value of the gift if it exceeds the annual gift exclusion of $14,000.

However, if you dip into your retirement plan for a cash injection, you will be required to pay taxes on the distribution. If you are under the age of 59 1/2, you may be subject to a 10% early withdrawal penalty as well. If you are completely and totally disabled or use the funds to pay for health insurance premiums while unemployed or are simply rolling over the funds to a new retirement plan, you will not face a penalty. Check with your tax pro or read up on the topic in IRS Publication 575. Ask your plan provider to withhold the income taxes due on funds you withdraw.  [snip] The article continues @ Fox Business, click here to continue reading...