What You Should Know If You Lose Your Job

In today’s tough economy, practically no job is safe. At any time, you can receive a pink slip and be out of work. What does this mean for you and your family? Here are the tax implications for some aspects of losing a job:

Unemployment Benefits

If you are terminated, you can probably collect unemployment benefits from your state. You have to apply for them by contacting your local unemployment office.

Unemployment benefits are fully taxable to you. You can opt to have federal income tax withheld from your benefits at the rate of 10%. You might want to make this election to avoid the need to make quarterly estimated tax payments if the benefits, along with your other income, mean you’ll owe taxes in excess of the withholdings from your paycheck to date.

Job Benefits That Come with You

When you leave your job, you may continue to enjoy certain benefits.

Outplacement services. If your employer pays for outplacement services, including an office from which to look for another job and job counseling, you aren’t taxed on this benefit.

Portable benefits. Some perks can come with you (you’ll have to continue to pay for them but usually at more favorable rates than you could obtain on your own):

• Health savings accounts. Any funds you’ve accumulated in your account are yours. You can continue to access the funds in your account to pay for medical costs for yourself, spouse, and dependent child on a tax-free basis (use of the funds for any other reason means you’ll owe income tax on the withdrawal, as well as a penalty if you’re under age 65).
• Health coverage. You may be entitled to continue coverage under your former employer’s group plan. Ask the HR department about COBRA coverage (continuing in your medical plan). The premiums you pay are a deductible medical expense if you itemize your deductions and total medical costs exceed 7.5% of your adjusted gross income.
• Retirement plan benefits. Any benefits you’re vested in, including all of your contributions to a 401(k) plan, are yours. They can be rolled over to an IRA or a qualified retirement of a new employer (if the new employer’s plan accepts the rollover). Making a rollover means you can continue to grow your retirement fund and won’t owe tax until you start taking withdrawals. However, if you’ve borrowed from your 401(k), you’ll have to repay the outstanding loan balance or be taxable on this amount. (Special rules apply to employer stock that’s held in your account and for rollovers directly to Roth IRAs.) Note: You may want to leave your retirement money where it is, something that may be advisable if you like the company’s investment options.

Job-Hunting Costs

Any expenses you incur to look for another job can be deductible. Such costs include printing and mailing resumes, traveling to interviews, and paying job agency fees.

The deduction for these costs is treated as a miscellaneous itemized deduction, so you have to itemize to claim the write-off. Then, the actual deduction is limited to amounts in excess of 2% of your adjusted gross income for the year.

Moving to a New Location

Your locality may be economically depressed; finding job openings may require you to relocate to a different part of the country. Fortunately, the cost of moving your family and household items to your new area may be deductible. You have to meet a distance test and work for a certain time in your new location, but if you qualify for the deduction, it’s yours even if you don’t itemize other deductions.

If your new employer reimburses you for these costs, you aren’t taxed on them.