Unemployment benefits are taxable at the federal level, but some states do not tax this income, says William Perez, a San Francisco-based enrolled agent, which is the highest credential the IRS awards and affords the recipient unlimited practice rights.
Be aware of taxes on no-penalty 401(k) withdrawals.
Immediately after a layoff, you might be tempted to take out a no-penalty withdrawal from your 401(k) (no-penalty withdrawals are not subject to the 10% early-withdrawal penalty, and can be taken out for special circumstances such as a layoff or permanent disability), but it’s still taxable income, says Perez.
Surprise! Your severance package is also taxable.
Petties’s six weeks of severance pay was taxed at a higher rate than her regular income because the Internal Revenue Service considers such pay to be “supplemental wages,†such as money earned from contract or freelance work. Such earnings may be subject to a self-employment tax of 13.3% (10.4% for Social Security and 2.9% for Medicare), which you’re required to pay if you’ve earned $400 or more.
Keep track of job search costs.
Petties may be able to deduct on her federal income tax return expenses related to searching for a new job. As of October, she had spent about $645. The costs of making résumé copies, travel to interviews, and outplacement agency fees can be deducted from one’s taxable income if they exceed 2% of a person’s adjusted gross income and if they are itemized on the tax return, says Hampton.
Hampton stresses that only those who lose their jobs involuntarily can deduct these expenses, and only if they haven’t already been reimbursed by an employer.
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