TAX NEWS - 2010

Tax Consequences of Losing Your Job

Losing your job is a miserable thing. Unfortunately, it is happening time and again these days. If you are let go, it is vital that you understand the tax consequences of losing your job. No, being fired isn't taxable, but follow up events can be.

I don't have to tell you that losing your job is unpleasant. Things can seem desperate at first, which is entirely understandable. That being said, you want to be very careful about tapping certain sources for money because there can be serious tax consequences. Even if you are careful, it is important to understand that certain benefits you receive are also taxable.

People who are let go will often receive severance pay. On top of this, they may take unemployment compensation to make ends meet. This is fine, but you should realize both of these monetary payment sources are taxable. Yes, even unemployment compensation. The same is true for any payment you receive from your former employer for unused vacation time.

You need to deal with your retirement account when you lose a job if it is based with the former employer. The way to do this is to "rollover" the account into a personal IRA or what have you. You might be tempted to tap this money. Don't! There are all kinds of tax penalties for doing so and you can end up with cumulative tax rates in the 60 to 70 percent range.

Is there any good news? Yes. Keep track of all the expenses you incur while job hunting. You can write them off when you file next year. Make sure to keep receipts so you don't get caught out in an audit. With so many people losing their jobs this year, it is an area that is ripe for abuse. When abuse occurs, the IRS starts doing audits.

You will find another job! It might take a bit, but you will. The economy will recover and we will see better days. Once you do find a new job, you might have to relocate. Once again, you can deduct most of the moving expenses you incur. Rent a truck to move your stuff? Deduct it! Make sure to save all your receipts so that you can get through any unwanted attention from the IRS.

These are rough times for just about everyone. Losing a job is no fun, but you want to avoid making things worse from a tax perspective. If you are at wits end, do what you have to do. You can always pay penalties and interest later on via an installment agreement with the IRS. If you can, however, avoid racking up a horrific tax bill.