Losing a job can feel like being shoved into a financial maze without a map. One moment you’re working, the next you’re wondering how to stretch your savings, manage benefits, and—yes—keep the IRS happy. The good news? With the right information and proactive steps, you can reduce tax surprises, preserve your resources, and focus on your next chapter.
At JS Morlu, we’ve guided countless individuals through this transition, helping them understand how severance, unemployment, retirement withdrawals, and other financial changes impact their tax situation. Here’s what you need to know.
1. Severance Pay & Unemployment Benefits: Taxable from the Start
It’s tempting to view severance as a financial cushion—and it is—but it’s also fully taxable in the year you receive it. Your former employer will include it on your Form W-2, so plan ahead for that tax bill.
The same goes for unemployment benefits. At the federal level, they’re taxable income. You can request to have 10% withheld by filing Form W-4V with your state agency. Keep in mind:
- Some states tax unemployment benefits.
- Others don’t—check your state’s rules to avoid an unpleasant April surprise.
Tip: If you expect other taxable income this year, set aside part of each unemployment payment for taxes.
2. Accumulated Leave Pay: Still Considered Wages
If you’re paid out for unused vacation or sick time, the IRS treats it like wages. It will appear on your W-2 and be subject to regular withholding. Failing to plan for this can mean an unexpected balance due at tax time.
3. W-2 Retrieval if Your Employer Shuts Down
Even if your former employer closes or files for bankruptcy, they must provide your W-2. If it doesn’t arrive by the end of January, the IRS can help you get a substitute form. Until then, keep your pay stubs—they’re your proof of earnings.
4. Financial Gifts from Friends or Family
Receiving help from loved ones? The good news: gifts aren’t taxable to you. However, if those gifts generate income (like dividends from gifted stock), that income is taxable. Also, if a gift exceeds the annual IRS exclusion, the giver—not you—may have to file a gift tax return.
5. Retirement Withdrawals: Proceed with Caution
Dipping into a 401(k) or IRA might feel like the only option, but it comes with consequences:
- Withdrawals are taxable.
- If you’re under 59½, you may face a 10% early distribution penalty—unless you qualify for an exception.
Penalty Exceptions Include:
- Medical expenses exceeding 7.5% of your AGI.
- Separation from service after age 55 (for qualified plans).
- Medical insurance premiums if you’ve been unemployed for 12+ weeks.
- Higher education expenses for yourself or family members.
- Hardship withdrawals (if your plan allows) for immediate and heavy needs.
- 60-day rollovers into another qualified plan or IRA.
6. Public Assistance and Food Stamps: No Tax Impact
If you qualify for programs like SNAP or state assistance, these benefits aren’t taxable. They’re meant to help you meet basic needs without adding to your tax burden.
7. Health Insurance: Don’t Skip the Coverage Check
Job loss often means losing employer health coverage. If you’re on a Marketplace plan, report your income change right away—this could trigger a special enrollment period or increase your premium tax credit.
Failing to update can mean owing money back if your income ends up higher than estimated.
8. Selling Assets: Consider Capital Gains
Selling investments while unemployed? Gains from stocks, bonds, or property sales are taxable. Minimize the hit by:
- Selling assets with the smallest gain.
- Harvesting losses to offset gains.
- Factoring in your overall tax bracket for the year.
9. Can’t Pay Your Taxes? The IRS Has Options
If you owe taxes but can’t pay in full:
- Short-term payment plans (up to 120 days).
- Long-term installment agreements (more than 120 days).
Act quickly to avoid additional penalties and interest.
10. Education-Related Tax Benefits
If you decide to return to school, tax deductions and credits can help—like the Lifetime Learning Credit or American Opportunity Credit. However, education costs for a completely new career typically aren’t deductible.
11. Considering Entrepreneurship? Know the Tax Rules
Starting your own business after a job loss can be empowering, but it changes your tax landscape:
- File Schedule C with your 1040.
- Pay self-employment tax (both the employer and employee share of Social Security & Medicare).
- Track every expense—startup costs, home office deductions, and more.
At JS Morlu, we regularly help new entrepreneurs build sound tax and accounting systems from day one.
The Takeaway: Proactive Steps Now Prevent Pain Later
Job loss is disruptive, but understanding the tax side of the equation can save you money and stress. The keys are:
- Know what’s taxable and what isn’t.
- Take advantage of exceptions and credits.
- Keep meticulous records.
- Reach out for professional guidance early.
At JS Morlu, we help individuals navigate these complex situations with strategies tailored to their unique needs—whether that means optimizing severance tax withholding, structuring penalty-free retirement withdrawals, or setting up a new business entity for your next chapter.
Need help making sense of your post-job-loss tax picture? Contact us today for a consultation and let us help you turn this transition into a financial stepping stone.