Unemployment Benefits, Taxes and Job Loss Tax Effects
Times have been tough this past year. If you have been the victim of outsourcing or downsizing during these turbulent economic times, see the tips below to make sure you receive any benefits due, and that you don’t make any costly tax errors on your return:
Unemployment Benefits Exclusion for Tax Year 2009
Unemployment compensation is considered taxable income, but thanks to the American Recovery and Reinvestment Act of 2009, the first $2,400 of any unemployment compensation you received in 2009 is not taxable. The first $2,400 may be excluded from your income and should not be reported on your 2009 Tax Return. If you are a married couple filing jointly and both spouses have received unemployment compensation, then each spouse may deduct $2,400 from their reported unemployment income.
IMPORTANT: You will receive a Form 1099-G stating exactly how much compensation you received in 2009. The eFile tax software will automatically subtract $2,400 from this amount, so you should enter the full amount when questioned about unemployment during the online tax interview.
Separation Pay and Other Compensation
Remember that any severance pay or unemployment compensation you receive is taxable, in addition to any payouts received for accumulated vacation or sick time, so be sure that enough tax is withheld from these payments. Make sure you receive your final W-2 form from your former employer to use for your tax return. Companies are not required to send out W-2s right away, but must provide them to all employees (even former ones) by January 31 of the following year. If you have left the company, this would be the year after you leave.
Health Insurance
Did you know that a federal law, known as COBRA, requires your employer to allow you health coverage under their policy for up to 15 months after you leave your job? (The law doesn't cover firings for gross misconduct.) However, you must pay the full cost of the premium, plus an administrative fee. Check around, because if you are healthy, you might find cheaper premiums than what you would spend on a COBRA policy. If you get a high-deductible policy (at least $1,100 for an individual or $2,200 for a family) you can qualify to set up a health savings account, which lets you make tax-deductible contributions and withdraw the money tax-free for qualified medical expenses.
Job Hunting Expenses
There are many expenses you might be eligible to deduct while you look for a new job. For more information on this, see Job Deductions – New Job or Job Search Related Deductions.
Retirement Savings
Losing your job is tough and you might be tempted to dip into your 401(k) account. Try not to do this if you can. If you cash in your 401(k) you will pay tax on every dime you withdraw (unless you have made after-tax contributions). Even worse, if you're under age 55 in the year you leave your job, you'll also be hit with a 10% tax penalty. Make sure that you don’t jeopardize your retirement savings and compromise your long-term financial health.
There are some better options for you. If you have more than $5,000 in your 401(k) account, you can leave your money with your old employer, where it will continue to grow in the tax shelter. You might be better off transferring your 401(k) balance to an IRA, where you would have almost unlimited investment options. You can request your old employer to send the money to the new tax shelter. If you have the money paid to you, with the idea that you'll deposit it in the new plan, the law requires your old plan sponsor to withhold 20% of your money for the IRS. It's tough to roll over money that's been confiscated by the IRS. You are also able to roll 401(k) money directly into a Roth IRA; but for now, if you want to use the Roth option, you must transfer your money to a regular IRA and then convert that account into a Roth. In either case, you have to pay taxes on the amount shifted to the Roth IRA, but all withdrawals after retirement will be tax-free.
If part of your 401(k) is invested in your old company's stock, be sure to check out the special rules for "net unrealized appreciation" which could save you money.
See these tax and financial options after a job loss.
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