The following is a guest post by Alan Kalman.
Job loss can affect your tax situation in many ways. Here are some things to keep in mind as you are preparing to file your taxes.
- Your employer may provide you with severance pay or accrued vacation pay or accrued sick pay. These payments are all taxable compensation. A large severance check could easily bump you into a larger tax bracket.
- If you qualify for and receive unemployment compensation benefits, these payments are also taxable. You will need to ensure that adequate state and federal income taxes are withheld from these payments.
- If you tap into your retirement account (IRA, 401(k), 403(b), federal TSP, etc.), these distributions will be fully or partially taxable. The plan administrator will withhold taxes. In addition, if you have not reached age 59 ½ (age 55 or 50 in certain circumstances) the taxable distribution will be subject to a 10 percent early withdrawal penalty unless you meet one of the exceptions.
- If you sell investments from non-retirement accounts, any gain on the sale of those assets is a taxable capital gain. However, you may be able to offset those gains with other capital losses. If your capital losses exceed your capital gains, you will be limited to a maximum loss of $3,000 on your tax return. Any excess capital loss may be carried forward to the next tax year.
- If you receive help or aid from third parties such as charities, friends and family, these payments are gifts and are not taxable income. Additionally, any public assistance you receive is also not taxable income.
- Due to the loss or lowering of income, the lower adjusted gross income (AGI) may now make you eligible for certain tax benefits or for a larger benefit. Among these are the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Credit, Retirement Savings Contribution Credit, and any of the higher education tax credits or deductions.
- Lastly, if you are an owner of real property, many states have property tax abatement or postponement programs for low income or unemployed individuals.
Alan Kalman is a volunteer for the AARP Foundation Tax-Aide Program in Santa Fe, N.M. He is a retired financial executive from IBM Corporation and Siemens AG. Through the AARP Foundation Tax-Aide program, AARP Foundation provides online tax counseling as a public service, and cannot guarantee the accuracy of the information provided. Your taxes are your responsibility. You are solely responsible for what you do in your own tax situation.