 | Publication 4128 Tax Impact of Job Loss The Life Cycle Series A series of informational publications designed to educate taxpayers about the tax impact of significant life events. Publication 4128 (Rev. 5-2020) Catalog Number 35359Q Department of the Treasury Internal Revenue Service www.irs.gov |
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Facts
JOB LOSS CREATES TAX ISSUES
References
The Internal Revenue Service (IRS) recognizes that the loss of a job may
• Publication 17, Your create new tax issues. The IRS provides the following information to
Federal Income Tax (For assist displaced workers.
Individuals)
• Severance pay and unemployment compensation are taxable.
• Publication 575, Payments for any accumulated vacation or sick time are also
Pension and Annuity taxable. You should ensure that enough taxes are withheld from
Income these payments or make estimated payments. See IRS Publication
17, Your Federal Income Tax, for more information.
• Publication 334,
Tax Guide for Small • Generally, withdrawals from your pension plan are taxable unless
Businesses they are transferred to a qualified plan (such as an IRA). If you are
under age 59 1⁄2, an additional tax may apply to the taxable portion
of your pension. See IRS Publication 575, Pension and Annuity
Income, for more information.
• Job hunting and moving expenses are no longer deductible.
• Some displaced workers may decide to start their own business.
The IRS provides information and classes for new business owners.
See IRS Publication 334, Tax Guide for Small Businesses, for
more information. If you are unable to attend small business tax
workshops, meetings or seminars near you, consider taking
Small Business Taxes: The Virtual Workshop online as an
alternative option.
Important Note about Health Insurance Coverage. If you, your
spouse, or your dependent enrolled in health insurance coverage
through the Health Insurance Marketplace and you have a change
in circumstances such as a change in income, let the Marketplace
know about it. Certain changes in circumstances - like loss of a job
or employer provided health insurance coverage - may also open the
door for a Marketplace special enrollment period allowing you to make
changes in your health care plan when it’s not open season. Reporting
changes will help you get the proper type and amount of financial
assistance so you can avoid getting too much or too little assistance in
advance. Find out more about the tax-related provisions of the health
care law at www.irs.gov/aca.
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Q&A
JOB LOSS: What Income is Taxable?
References
The following Questions and Answers are provided by the Internal
• Publication 17, Your Revenue Service to clarify the tax implications of financial issues
Federal Income Tax (For faced by workers who have lost their jobs. References are provided for
Individuals) additional information.
• Publication 505, Is severance pay taxable?
Withholding and Yes, severance pay is taxable in the year that you receive it. Your employer will
Estimated Tax include this amount on your Form W-2 and will withhold appropriate federal
and state taxes. See Publication 525, Taxable and Nontaxable Income, for
• Publication 525, Taxable additional information.
and Nontaxable Income
Is accumulated leave (vacation and/or sick pay) taxable?
• Form W-2, Wage and Yes, annual leave/vacation pay, and sick pay are calculated as wages by your
Tax Statement employer and will be included in your Form W-2.
• Form W-4V, Voluntary Is unemployment compensation taxable?
Yes, your state unemployment insurance benefits (up to 26 weeks) and your
Withholding Request
extended benefits are taxable. You may choose to have 10% withheld for
• Form 1099-G, Certain federal taxes by completing Form W-4V. The State will provide you with a
Government Payments paper Form 1099-G or make it available electronically by January 31st of
each year, showing the amount of taxable benefits paid in the prior year. See
• Instructions and Form Publication 525 for additional information.
709, United States Gift What about gifts of cash and property from family or friends?
Tax Return Generally, the person who receives the gift is not liable for any taxes on the
gift. If the gift produces income like interest, dividends or rent payments, the
receiver would be responsible for taxes on that produced income. Each year
there is a specific maximum amount that may be given that will not create a
taxable event to either the giver or the receiver. Gifts in excess of this maximum
may, be subject to gift taxes by the gift giver. See Publication 17 Your Federal
Income Tax (For Individuals) or Instructions to Form 709, United States Gift Tax
Return, for additional information.
If I am eligible for public assistance or food stamps, is it taxable?
No.
When will I get my final Form W-2 from my employer?
Your employer must provide your Form W-2 by January 31st after the close of
the calendar year. As an example, 2020 Forms W-2 are due to employees by
January 31, 2021.
What if my employer filed bankruptcy or went out of business, how do I
get my Form W-2?
In either case the employer must file and report your wages and withholding
on a Form W-2 at year’s end. If you do not receive your Form W-2, try to
contact your employer or their representative. If you are unsuccessful, the
IRS can assist you in filing a substitute Form W-2 using your records. A good
precaution is to keep year-to-date records or pay stubs until you receive your
Form W-2.
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Q&A
JOB LOSS: What Income is Taxable?
(continued)
Can I file an early tax return and receive any refund due?
No. Individual income tax returns are based on a calendar year and cannot be
filed earlier than January of the next calendar year. By law, Internal Revenue
Service cannot issue refunds claiming the Earned Income Tax Credit (EITC) or
the Additional Child Tax Credit (ACTC) before mid-February. This applies to the
entire refund − even the portion not associated with the EITC or ACTC.
If I sell other assets like stocks, bonds, and investment property, are they
immediately taxable?
Not necessarily, however the sale of such assets should be reported. If you
have a gain on the sale, it may generate an income tax liability. You should
review your overall tax situation and make sure you have paid your taxes as
required to avoid any estimated tax penalty. Information on estimated tax is in
Publication 505 Withholding, and Estimated Tax.
What can I do if I owe taxes and cannot pay them?
Contact the Internal Revenue Service as soon as possible to request a
payment plan. Communication is the key to minimizing problems.
Payment options include a short-term payment plan (paying in 120 days or
less) or a long-term payment plan (installment agreement for payments longer
than 120 days). You may qualify to apply online for one of these payment
options.
Is special assistance available on unresolved tax matters that create
hardships?
Yes, if you are experiencing economic harm, a systemic problem or are
seeking help in resolving tax problems that have not been resolved through
normal channels, you may be eligible for Taxpayer Advocate Services (TAS)
assistance.
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Q&A
JOB LOSS: Pensions/IRAs – What’s Next?
References
The following Questions and Answers are provided by the Internal
• Publication 17, Your
Revenue Service to help you handle financial issues with a tax impact
Federal Income Tax (For
which may arise if you lose your job.
Individuals)
What if I withdraw money from my qualified retirement plan or Individual
• Publication 575, Retirement Arrangement (IRA)?
Pension and Annuity Generally speaking, if you withdraw the funds before you reach eligible age,
Income and do not roll it over into another qualified retirement plan or Individual
Retirement Account (IRA) within 60 days, that amount will be taxable income
• Publication 590-A, in the year in which it is withdrawn. You may also have to pay an additional
Contributions to 10% tax on those early distributions. There are special rules for computing tax
Individual Retirement on lump-sum distributions. See IRS Publication 17, Your Federal Income Tax
Arrangements (IRAs) (For Individuals) or Publication 575, Pension and Annuity Income for detailed
information.
• Publication 590-B,
Distributions from Are there any “hardship” exceptions to the early distribution penalties?
Individual Retirement Yes, there two exceptions specifically related to job loss. The additional 10%
tax does not apply for distributions from a qualified retirement plan if you are
Arrangements (IRAs)
age 55 (age 50 for qualified public safety employees) in or after the year of
• Form 8606, separation from service. Also, you do not have to pay the additional tax on
distributions during the year from an IRA that aren’t more than the amount you
Nondeductible IRAs
paid during the year for medical insurance for yourself, your spouse, and your
dependents. To qualify, you must have:
1. lost your job,
2. received unemployment compensation paid under any federal or
state law for 12 consecutive weeks because you lost your job,
3. received the distributions during either the year you received the
unemployment compensation or the following year and
4. received the distributions no later than 60 days after you have been
reemployed.
For other exceptions not related to job loss but may apply, see Publication
575 and Publication 590-B, Publication 590-B, Distributions from Individual
Retirement Arrangements (IRAs).
Can I move money from my qualified retirement plan into another qualified
retirement plan or IRA?
Yes, this is called a “rollover”. You can choose to have any part or all of an
eligible rollover distribution paid directly to another qualified retirement plan
that accepts rollover distributions or to a traditional or Roth IRA.
If you choose the direct rollover option, or have an automatic rollover, no tax
will be withheld from any part of the distribution that is directly paid to the
trustee of the other plan. If any part of the eligible rollover distribution is paid to
you, the payer must generally withhold 20% of it for income tax.
However, the full amount is treated as distributed to you even though you
actually receive only 80%. You generally must include in income any part
(including the part withheld) that you don’t roll over within 60 days to another
qualified retirement plan or to a traditional or Roth IRA. See Publication 575,
Pension and Annuity Income for additional information.
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Q&A
JOB LOSS: Pensions/IRAs – What’s Next?
(continued)
If I made an IRA contribution during the current tax year, can I withdraw it
before the close of the year?
Yes. Contributions returned before the due date of the return can be withdrawn
without penalty. You must take the contribution and any interest or dividend it
may have earned. This is a tax-free event if:
1. you do not take a deduction for the contribution and
2. you withdraw any income or interest the investment made while in
the IRA and include that amount in your income. See Publication
590-A, Contributions to Individual Retirement Arrangements (IRAs)
for more information.
I’ve had my IRAs for several years. In some of those years I didn’t benefit
from any deduction due to my income. How do I figure what part of the
distribution is taxable?
If you had non-deductible IRA contributions, you would have completed Form
8606, Nondeductible IRAs, to establish your basis (cost) in your combined
IRAs. Use the worksheets in Publication 590-A and Publication 590-B to
calculate what part of the distribution is taxable and complete Part I on Form
8606 and attach it to your return.
If I take my pension and transfer it to an IRA, are there any special rules or
restrictions?
Rolling over your pension distribution to a financial institution: (i.e., bank, credit
union, brokerage house, etc.) is straightforward. Prohibited transactions with
an IRA include:
1. borrowing money against it,
2. selling property to it,
3. using it as security for a loan or pledging the IRA account as
security or
4. buying property for personal use (present or future) with IRA funds.
In general, there is a 15% tax on the amount of the prohibited
transaction and a 100% additional tax if the transaction isn’t
corrected. Review the information in Publications 575, 590-A and
590-B for additional information.
Who can I talk with to discuss distributions from my retirement accounts
and the affect it will have on my tax liability?
If you are unable to find the answers to your questions or have additional
questions after researching Publications 17, 575, 590-A and 590-B, contact
your plan administrator, financial planner or tax advisor.
Publication 4128 6
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Q&A
JOB LOSS: Starting Your Own Business
References
Every new phase of life brings many challenges. The Internal Revenue
• Publication 15, (Circular Service recognizes that the loss of a job can create new tax situations
E), Employer’s Tax for you. The following information is provided to clarify possible tax
Guide implications.
• Publication 334, Can I be an employee and a business owner in the same tax year?
Tax Guide for Small Yes. Under the tax law, you can be both an employee and a business owner at
Businesses the same time if you choose. The primary issue is to report all income on your
return.
• Publication 505,
Withholding and Where can I get information about starting my own business?
Estimated Tax Publication 334, Tax Guide for Small Business, Publication 583, Starting
a Business and Keeping Records are free publications that have helpful
• Publication 583, information for small business owners. In addition, Publication 4591, Small
Starting a Business and Business Federal Tax Responsibilities, provides a summary of the reference
material for the business owner. These products contain information on starting
Keeping Records
your own business, record keeping, and deductible expenses.
• Publication 596, Earned
What options do I have for organizing my business?
Income Credit Under the federal tax code, there are three options: Sole Proprietorship,
Partnership or Corporation. A number of factors may influence your decision
• Publication 4591, Small
about which structure is best for you including cost of start-up, exposure to
Business Federal Tax risk or liability, financing, and the tax implications.
Responsibilities
What record keeping requirements do I have as a Sole Proprietor?
• Form 940, Employer’s Generally, you should keep detailed records of your income and expenses
Annual Federal for your business to prepare not only required tax returns but also financial
Unemployment Tax statements to help in maintaining and growing your business. The same
Return general rules apply for Partnerships and Corporations with some additional
detail.
• Form 941, Employer’s
Quarterly Federal Tax How do I report my business income?
Return As a sole proprietor, you will need to file a Form 1040, Schedule C, Profit or
Loss From Business (Sole Proprietorship) to report your income and eligible
• Form 1040, U.S. business expenses. You may also be eligible to deduct up to 20 percent of
Individual Income Tax qualified business income (QBI) from domestic businesses operated as sole
proprietorship regardless of whether you itemize your deductions on Schedule
Return
A or take the standard deduction. Limitations for the QBI deduction may
• Schedule C, Profit or apply. For more information, please see Publication 334, Tax Guide for Small
Loss From Business Business, and Publication 535, Business Expenses.
(Sole Proprietorship) What kinds of taxes do I pay as a sole proprietor?
Taxes due on your net self-employment income (total business income minus
• Schedule SE, Self- expenses) include federal income tax and self-employment (Social Security
Employment Tax and Medicare) taxes and they are reported on Schedule SE, Self-Employment
Tax. Additional information is available in Publication 334, Tax Guide for Small
Businesses. You are responsible for employment taxes if you have employees
working in your business. See Publication 15, (Circular E), Employer’s Tax
Guide, for details.
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Q&A
JOB LOSS: Starting Your Own Business
(continued)
How do I pay my taxes as a Sole Proprietor?
Federal income taxes including Self-Employment tax use a pay-as-you-go
system. Generally, you would pay using the 1040ES Estimated Tax process
on a quarterly basis. You generally must make estimated tax payments if you
expect to owe taxes of $1,000 or more when you file your return. For more
information, see Publication 505. Employment taxes are paid using Forms 941,
Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual
Federal Unemployment Tax Return. The filing requirements for each of these
forms and instructions on how to pay these taxes and due dates are included
in the Publication 15, Circular E, Employer’s Tax Guide.
Can I claim the Earned Income Credit on my net self-employment
income?
Yes, net income from a Sole Proprietorship is earned income and is one of the
qualifications for earned income credit. The Earned Income Credit is available
to taxpayers that meet certain income guidelines. See Publication 596, Earned
Income Credit.
Are classes or seminars available to get additional information?
Yes. The Small Business/Self-Employed (SB/SE) Division of the Internal
Revenue Service has a number of Small Business seminars through out the
nation. If you are unable to attend small business tax workshops, meetings
or seminars near your, consider taking Small Business Taxes: The Virtual
Workshop online as an alternative option. Other online learning tools are also
available on the SB/SE Tax Center.
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Q&A
JOB LOSS: Miscellaneous Tax
References
Information
• Publication 502,
Medical and Dental Every new phase of life brings many challenges. The Internal Revenue
Expenses Service recognizes that the loss of a job can create new tax situations
for you. The following information is provided to clarify the tax
• Publication 523, Selling implications.
Your Home
If I sell my home, do I have to pay taxes on the money I make?
• Publication 596, Earned Usually you do not have to pay tax on the first $250,000 ($500,000 on a joint
Income Credit return in most cases) of gain from the sale of your main home. Generally, you
must have lived in and owned the home for at least two years of the five years
• Publication 969, Health prior to the sale and not excluded a gain on another home in the past two
Savings Accounts and years. For more information, see Publication 523, Selling Your Home.
Other Tax-Favored
Now I have to pay the full cost for my health insurance. Is this deductible?
Health Plans
Health insurance premiums are includible in your medical and dental bills.
• Publication 970, Tax They are deductible on Schedule A, if you itemize. Some limitations apply. See
Publication 502, Medical and Dental Expenses, for more information.
Benefits for Education
Can I deduct contributions I made to a Health Savings Account (HSA)?
• Form 1040, U.S. Income If you are an eligible individual, you can claim a tax deduction for contributions
Tax Return you, or someone other than your employer, make to your HSA even if you do
not itemize your deductions on Form 1040. For more information
• Schedule A, Itemized
see Pub 969, Health Savings Accounts and Other Tax-Favored Health Plans.
Deductions
Can I claim the Earned Income Credit this year?
Even though your income may have exceeded the thresholds for this credit in
past years, you may be eligible for the credit this year. The credit is available
to taxpayers who meet certain income guidelines. For more information, see
Publication 596, Earned Income Credit.
My chances of finding a new job will be better if I take a few college
courses. Can I deduct any of my tuition?
There are a number of tax benefits available for going to college or taking
college courses. Some of the benefits are credits and others are deductions
from your income. Refer to Publication 970, Tax Benefits for Education, for
more information.
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