If you lost your job in 2011 how do you handle that on your taxes? From unemployment payments to job hunting expenses, reporting it all to Uncle Sam can get complicated. But Galtime got some great tips to make it a little less complicated from the accountants at the Massachusetts Society of CPA's.
The Top 6 Tax Concerns if Unemployed
1. Is My Severance Package Taxable? If you are let go and receive severance pay from your former employer, that pay is considered taxable income. It will be included on your W-2 form and your employer will withhold taxes on it. Similarly, if your former employer compensates you for the value of any accumulated vacation or sick days, or other types of leave, that compensation is also taxable. (Be aware that even companies that go out of business or declare bankruptcy must report your wages and withholding and send you a W-2 form that shows all your income earned.) Of course, you will also have to pay any taxes due on wages you earned last year before you lost your job. For wages earned in 2011, you should have received a W-2 from your employer by January 31.
2. Will I Be Taxed on Unemployment Insurance? Yes, you will also have to pay taxes on state unemployment insurance benefits and any extended benefits you collect. You can ask the state to withhold your taxes for you, just as your employer did, so that you don’t have a tax bill waiting for you at filing time. If you qualify for public assistance or food stamps, you will not have to pay taxes on those benefits.
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3. What If My Family Helps Me Out? There are special rules that address the taxation of gifts. Generally, taxpayers are allowed to give another individual up to $13,000 without paying taxes on that gift.
4. What If I Dip into My Retirement Money? As a general rule, any money you withdraw from your retirement plan or IRA will be taxed in the year of the withdrawal if you have not yet reached eligible retirement age, generally age 59 ½, and don’t roll the money over into another qualified retirement account within 60 days. If you took $10,000 from an IRA in 2011, for example, you’ll have to pay taxes on it when you file this year. In addition, if you have not yet reached eligible retirement age, you’ll also owe a 10 percent penalty—or $1,000—for early withdrawal. That’s one reason CPAs strongly advise against raiding your retirement account. There are hardship exemptions if you’re permanently disabled or have certain medical expenses, so check with your CPA for more information if you believe you qualify. Also, note that if you want to withdraw any IRA contribution you made in 2011 you can do so without tax or penalty as long as you did not take a deduction for the contribution and you do not withdraw any interest or earnings you made on that contribution.
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5. Are Job Hunting Expenses Deductible? Yes, you can deduct many types of costs, including resume preparation and mailing expenses, employment agency fees and related travel outlays, as well as some moving costs if you relocate to start a new job. Ask your CPA for more details about what’s eligible.
6. What If I Can’t Pay My Taxes? The best step is to get in touch with the Internal Revenue Service immediately and explain your situation. The IRS typically has payment plans available for those who are suffering financial hardship and having a hard time covering their tax bills. You can find more information at 1-800-829-1040 or online at www.irs.gov. If you continue to have trouble settling your tax problems, contact the Taxpayer Advocate Service at 1-877-777-4778. Of course, your CPA can also offer advice in this situation. The IRS also offers some free help to certain taxpayers.
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