Many people have lost their jobs due to the bad economy. If you have lost your job, you should know that this may create new tax issues for you. The information below explains some of those issues.
- Severance pay and money for unused sick or vacation time. Severance pay (money in addition to wages and any other money that your employer owes you when your job ends) is taxable. If your employer gives you money for unused vacation or sick time, those amounts are also taxable. Your ex-employer should include all payments to you that are taxable income on your Form W-2 for the year you received those amounts. Many employers automatically withhold taxes from these payments.
- Unemployment insurance benefits. State unemployment insurance benefits and extended benefits are taxable. You may choose to have 10% of these benefit amounts withheld for federal taxes by completing Form W-4V. The State will provide you with a Form 1099-G prior to January 31 of the year after the year in which you received the unemployment benefits.
- Gifts you receive during your unemployment. If you receive gifts of either cash or property from friends or family to help you while you are unemployed, you are generally not liable for any tax on the amount received. If the gift produces income— such as interest, dividends, or rent payments—you are responsible for taxes on that income. If a gift exceeds the allowable annual exclusion amount, the gift-giver may have to pay a gift tax. For the year 2011, gifts up to $13,000 are not taxable.
- Public assistance and food stamps/SNAP. These benefits are not taxable.
- Your employer goes out of business or files for bankruptcy. An employer who goes out of business or files for bankruptcy during the year is still responsible for sending you a Form W-2 by the end of January. If you do not receive a Form W-2, try to contact your former employer. If you cannot get the information you need from your former employer, contact the IRS. The IRS may help you file a substitute Form W-2 using your pay records.
- Money you take from your pension plan. Money taken out of your pension plan is usually taxable unless it is transferred to a qualified plan, such as an IRA (Individual Retirement Account). Unless you qualify for an exception, if you are under the age of 59½ and you withdraw money from your pension, you will lose 10% of the taxable portion of your pension as a penalty. To claim an exception from the early withdrawal penalty, you must submit a Form 5329 with your tax return, (See more information in Tax Penalty for Early Withdrawal of Retirement Funds.) If, however, you put money into your IRA before the due date of your return, you may withdraw the amount of the contribution. But you must also withdraw any interest the contribution made while in the IRA. You must include this amount in your income.
- Job search deductions. You may be able to deduct certain expenses, employment agency fees, costs for résumé preparation, and travel expenses for job searches and interviews. IRS Publication 17 has more information on these deductions.
Remember to File a Tax Return
Even if you are unable to pay your taxes, you should still file a tax return. The IRS offers options to those who file returns but cannot pay their taxes.
If you need help dealing with IRS collection activities or have tax-related questions, call LSNJ-LAW™, Legal Services of New Jersey's statewide, toll-free legal hotline, and ask for the Low-Income Tax Clinic. The hotline telephone number is 1-888-LSNJ-LAW (1-888-576-5529) or 732-572-9100 if you are calling from outside New Jersey. Hotline hours are Monday-Friday, 8 a.m. to 5:30 p.m.
This article is originally from the October 2009 issue of Looking Out for Your Legal Rights®, updated in 2011.
This information last reviewed 11/2/11.