Losing your employment can be tough, both emotionally and financially. However, it’s important during this time to remain proactive about your finances and your tax status. If you’ve recently lost your job, here are a few steps you can take along with the tax implications of each.
Begin the Job Hunt
It’s probably the last thing you want to do right after being let go, but you should start looking for a new position immediately. As soon as possible, update your resume and take stock of your professional achievements. If you work in a creative field, you’ll also want to update your book or portfolio.
Ideally, you’ll find a position in your preferred field, but if you feel like your unemployment period might last a while, you might consider a temporary position or even a gig-based opportunity such as Lyft or Postmates.
If you do find a position in the same field, you’ll be eligible to claim any job search-related costs as an itemized deduction on your tax return. If you choose to work in a self-employed field while you search for the perfect new career, you will likely be required to file a 1099-MISC along with estimated quarterly taxes. Keep detailed records of your work-related mileage and expenses, as many of these costs are deductible.
Do Not Liquidate Your 401(k)
When people suddenly lose their jobs, the impulse to liquidate their retirement accounts for some extra financial breathing room can be overwhelming. However, we strongly advise against doing this, as there could be substantial penalties and taxes attached.
Instead, roll your account(s) over into a traditional IRA so the money will remain tax-deferred. You could also roll it into a Roth IRA, which will allow for more diverse investment options, but you will have to pay taxes on the amount converted.
Another option is to leave your 401(k) with your previous employer, where the money will remain tax-deferred; however, you’ll no longer get the benefit of your employer matching your contributions.
Contact S.H. Block Tax Services for more information on your unique situation, and whatever you do, don’t liquidate your retirement account without careful consideration.
File for Unemployment
If you lost your job for reasons beyond your control, you may be eligible for unemployment and should apply as soon as possible. In some cases, you can receive unemployment benefits even if you were fired.
Either way, be sure to check with the Maryland Division of Unemployment Insurance for more information. The short-term income from unemployment benefits can help keep you afloat while you pursue your next opportunity.
Unfortunately, unemployment benefits are considered taxable income. You do have the option to have taxes withheld from your unemployment checks, but depending on your financial circumstances, you might prefer not to. However, if you choose not to have taxes withheld, don’t forget that you may owe the IRS a significant amount come tax season.
Assess Your Healthcare Options
Even if you lose medical coverage along with your job, COBRA provisions should provide you with continued coverage for up to 18 months (36 months if you experience certain qualifying life events). You will be required to pay a larger portion of your premium — perhaps even all of it — but at least you will maintain consistent health coverage during this difficult transition.
The good news is that if you choose to work on a self-employed basis or as an independent contractor, your health insurance premiums are likely tax deductible. If you are married, another option would be to have your spouse add you to their coverage, but your partner should sit down with their HR representative to review their options before updating their benefits package.
Update Your Monthly Budget
This one seems obvious, but it’s also the most difficult to adhere to. When things are going smoothly and finances are stable, it can be easy to get accustomed to a certain lifestyle. When circumstances change, however, old spending habits can be difficult to break.
If you’ve never made a formal budget for yourself, now is the time. You can either make a simple Excel spreadsheet or use a more polished and user-friendly tool such as YNAB or Mint. Remember to add items that might have been previously covered as part of your employment, such a new vehicle (if you previously had access to a company car) or healthcare coverage. Be as thorough as possible and include a field for all tax-related expenses or savings.
Facing Tax Issues Related to Your Employment Status? S.H. Block Tax Services Is Here to Help
Follow the tips above to help mitigate potential tax issues or liabilities during this transitional period. And if you’re looking for tax help related to your employment status, please contact the experienced tax professionals at S.H. Block today to schedule your free consultation.
Call us at (410) 793-1231 or complete this brief form and we will get in touch promptly. We can even direct you toward useful employment and financial resources that will help you and your family through this challenging time.