It’s no secret that job loss is one of the most stressful life events you’ll experience. You deal with thoughts such as “How will I pay my bills? What about insurance? Will I get another job soon? Can I get Unemployment Insurance?” as the reality of your job loss sinks in.
Losing a job, either through termination or layoff hits hard on all fronts. You might also end up taking a hit on the tax front if you’re not familiar with how unemployment affects your tax scenario. Here are a two instances in which unemployment can alter your tax status.
Unemployment Insurance
The IRS considers Unemployment Insurance (UI) fully taxable income. In some cases (options vary from state to state) you can elect to have taxes deducted at the time you file your claim, and then again once you fill out your continuing claim form.
Either way, you’re going to be hit with taxes, either up front when they are deducted from each UI check (if you’ve elected this option) or at the end of the year when you file your taxes.
Think carefully and consider each option. Whether or not you have access to any other income ( e.g. severance pay, investments, child support.) and how cash-strapped you are will influence which option you select.
When in doubt, talk it over with a tax advisor who can assess your tax situation and current circumstances.
If unemployment has left you in the lurch financially, check with your local United Way 211 referral service. They may be able to refer you to low-cost or no-cost year-round tax services.
Otherwise, if you have the means it would be a good idea to meet with a tax advisor who can help you to fully assess your options.
IRA Distributions
You won’t know for weeks whether or not you qualify for unemployment, and it could a few more weeks before you see that first UI check or deposit if you do qualify. Meanwhile, your IRA is there, ripe for the picking. After all, bills are due and the landlord or mortgage company is getting restless.
You guessed it. There’s a tax hit for withdrawing funds from your IRA if you’re younger than 59 1/2. A 10 percent tax hit up front, and then an additional 20 percent hit if your IRA is tax-deferred (no taxes were deducted at the time of contribution).
There may be a way around those tax hits at the same time: the Qualifying Reason clause. Generally, the IRS won’t tax your early IRA distribution if you can demonstrate one of these scenarios:
- The funds were withdrawn for college expenses for yourself, a child, spouse or grandchild
- If you need to cover the expense of a sudden disability
- If you have medical expenses that are not covered by insurance and that exceed 7.5 percent of your Adjusted Gross Income (AGI)
- First-time home purchase (can withdraw up to $10,000 tax-free)
Remember, the IRS will require supporting documentation for any of the above circumstances so keep any related receipts and records.
Sudden job loss can wreck havoc on your finances and well-being. By knowing your tax options up front, you will be able to make an informed decision regarding the best options for you.
If you’ve been hit with a layoff or job loss and are struggling to pay your tax bills, we can help. Just click the white “Start Chat” button at the top right-hand corner of any of your pages, and you’ll be put in touch with one of our qualified tax pros. Job loss is stressful enough; don’t let a looming tax bill add to your stress.
