Unemployment Benefits, Job Loss, and Taxes

Unemployment &
Job Loss

If you have been the unfortunate victim of outsourcing, downsizing, or layoffs, 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 Compensation and Benefits

Unemployment compensation is considered taxable income. The IRS requires you to report all unemployment income you receive. You should be mailed a Form 1099-G before January 31st of the year stating exactly how much in taxable unemployment benefits you were paid in 2019 and all unemployment income must be reported. If you wish to have 10% withheld for federal taxes, you can complete and give Form W-4V to your state tax agency. You can prepare and e-File Your Taxes here on eFile.com. Contact us about special promo codes for unemployed and taxpayers who lost their job in 2019.

Severance 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 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 And Job Loss

Did you know that a federal law, known as COBRA, requires your employer to allow you health coverage under their policy for 18 months after you are laid off? (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, you can set up a health savings account (HSA), which lets you make tax-deductible contributions and withdraw the money tax-free for qualified medical expenses. You will still need to report your health insurance coverage on your return in the year that you lose your job if you wish to claim the Premium Tax Credit. If your health insurance changes as a result of your job loss, or if you get another job, be sure to report any income changes, or loss of health insurance to the Marketplace if you are claiming the Premium Tax Credit.

Using Retirement Savings For Expenses

Losing your job is tough and you might be tempted to dip into your qualified retirement plan, IRA, or 401(k) account. Try not to do this if you can. If you cash in your retirement plans, you will pay tax on every dime you withdraw (unless you have made after-tax contributions or you have certain extenuating circumstances). Even worse, if you are under age 59 1/2 in the year you leave your job, you will 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.

However, if you have enough money in your 401(k) account, you can leave your money with your old employer, where it will continue to grow. 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 IRA. 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 in IRS Publication 575 - Pension and Annuity Income, which could save you money.


If you lose your job, you might decide to start your own business. New business owners should check out the information that the IRS provides for you in IRS Pub 334 - Tax Guide For Small Business. You should also review the tax implications of being newly self-employed.

More Information

See what other tax deductions you may qualify to claim on your tax return.



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