Does Job Loss Affect Your Tax Situation?
By: Tax Hotline
Spring 2020 (Vol. 38, No. 1)
Q: I lost my job. How does this affect my tax situation?
A: The loss of a job may create new tax issues. For example, any severance pay you receive is considered taxable income as are any payments for accumulated vacation or sick time. While it isn’t always possible to do so, making sure that enough taxes are withheld from these payments will help you to avoid a big bill at tax time. Another thing to keep in mind is that if you receive unemployment compensation, this money is taxable. SNAP (formerly known as food stamps) and public assistance, however, are not taxable - nor are Economic Recovery Payments sent during the coronavirus pandemic.
Q: Am I eligible to receive unemployment compensation?
A: Depending on your circumstances, you may be eligible for one of the following types of unemployment compensation:
- Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
- Railroad unemployment compensation benefits
- Disability payments from a government program paid as a substitute for unemployment compensation
- Trade readjustment allowances under the Trade Act of 1974
- Unemployment assistance under the Disaster Relief and Emergency Assistance Act
- Pandemic Unemployment Assistance (PUA) under the CARES Act of 2020
Under the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, states are permitted to provide Pandemic Unemployment Assistance (PUA) to individuals who are self-employed, seeking part-time employment, or who otherwise would not qualify for regular unemployment compensation.
To verify income, states are generally requiring applicants to provide current year tax forms. Voluntarily deciding to quit your job out of a general concern about exposure to COVID-19 does not make you eligible for PUA; however, there are circumstances where an individual may be eligible for PUA.
Q: Is unemployment compensation tax-free?
A: No. Unemployment compensation received under the unemployment compensation laws of the United States or of a state is considered taxable income and must be reported on your federal tax return. You must also include benefits from regular union dues paid to you as an unemployed member of a union in your income. However, if you contribute to a special union fund and your contributions are not deductible, then other rules apply. If this applies to you, only include in income the amount you received from the fund that is more than your contributions.
You can choose to have federal income tax withheld from your unemployment benefits by electing that option when you file for the benefit or by filling out Form W-4V, Voluntary Withholding Request. If you complete the form and give it to the paying office (e.g., your state’s Department of Labor), 10 percent of your payment amount will be held as tax. If you choose not to have tax withheld, you may have to make estimated tax payments throughout the year. You may also owe tax when you file your tax return next year. If you received unemployment compensation, you will receive Form 1099-G, Certain Government Payments (Info Copy Only), showing the amount you were paid and any federal income tax you elected to have withheld.
Q: Can I deduct expenses related to a job search?
A: Under tax reform, many miscellaneous deductions were eliminated. As such, for tax years 2018-2025, you are no longer able to deduct certain expenses such as travel, resume preparation, and outplacement agency fees incurred while looking for a new job. In prior years, job-seekers were able to deduct these expenses even if they did not get a new job. Normally, to collect unemployment compensation you have to actively be searching for work. However, the CARES Act gives states flexibility in determining whether an individual is “actively seeking work” if he or she is unable to search for work because of COVID-19, including because of illness, quarantine, or movement restrictions.
Q: What if my employer went out of business or into bankruptcy?
A: Your employer must provide you with a Form W-2 showing your wages and withholding by January 31. You should keep up-to-date records or pay stubs until you receive your Form W-2. If your employer or its representatives fail to provide you with a Form W-2, contact the IRS. They can help by providing you with a substitute Form W-2. If your employer liquidated your 401(k) plan, you have 60 days to roll it over into another qualified retirement plan or IRA.