Losing a job can be overwhelming -- emotionally and financially -- and unfortunately 2020 left many Americans facing this harsh reality. Once you get past the initial shock of sudden or unexpected unemployment (and the first tub of ice cream to help on the emotional side...), you'll want to check that you have your other bases covered.
Severance Pay - if you received severance pay, it will be included on your W2 as income, and fully taxable. A significant severance package payout has the potential to change your tax bracket, so be sure to reach out to your CPA or accountant and make them aware of this life changing event as soon as you are able to.
Vacation/Sick Time that has been paid out - If you had unused vacation days, sick days or any other type of PTO, it's also taxable income and will be included in your W2.
Health Insurance - This is a big one. Although the impact is less about taxes, it does affect your wellbeing and could impact your cash flow if you take advantage of COBRA or Marketplace Insurance. If your health insurance was through your employer's group health coverage plan, you'll now need to consider other insurance options for you and your family (if applicable).
If it is available to you, COBRA (Consolidated Omnibus Budget Reconciliation Act) Coverage may be an option. COBRA feels expensive because it's no longer subsidized by your employer. It could cost you 100% of the insurance cost (where your employer would have previously paid a portion) + 2% to cover administration costs. COBRA usually lasts up to 18 months.
Health Insurance Marketplace Coverage is available when your existing health coverage is lost. Depending on your income, you may qualify for a premium tax credit to help cover the cost of the insurance. If your health insurance was already from the Marketplace and not an employer, and you lose your job, notify the Marketplace of the decrease in income to determine if you're eligible for an increased advanced premium tax credit (to help offset the insurance cost). In the same respect, when you are employed again, promptly notify the Marketplace so that they can evaluate the amount of the credit again to avoid having to repay it when you file your tax return.
Life Insurance - This is also a big one, and similar to health insurance, impacts your life more than just your taxes. I always recommend having a life insurance policy outside of what your job offers you, because coverage through your employer typically ends if/when employment ends. In my past life, I worked at a life insurance company and didn't realize that. My insurance policy would have been less expensive if I had established it on my own at 26 versus getting it independently when I was 32 after I left that job. Employer-offered life insurance is a good thing -- it just shouldn't be your 'only' thing.
Retirement Plan - Depending on how much money you had in your employer's retirement plan, and the provisions of the plan, you may have the option of leaving your retirement funds in the employer's plan or moving the funds to your own account (or new employer if you have one). Transferring is optimal, but you do have the option of withdrawing the funds as a distribution and rolling it over. But talk to your CPA or accountant first -- there are rules to completing this in a manner that will avoid a taxable event. If you opt to take a withdrawal, and you are under the age of 59 1/2, note that there will be tax and penalty. AS part of the CARES Act, qualified taxpayers can take COVID-19 related distributions from qualified plans or IRAs (less than $100k from Jan 1, 2020 - Dec 31, 2020) and receive favorable tax treatment. They will not incur the 10% early withdrawal penalty, can be taxed over three years, and redeposited to an IRA or qualified plan within three years. Again, this is a decision to include your CPA or accountant in as you're considering it so that they can guide you through and avoid common tax pitfalls.
Home Sale Gains -- If you decide to sell your home due to job loss (or for any other reason), you may be able to exclude a sizable portion of the gain from being taxed. If you have owned and occupied the home as your primary residence for 2 of the previous 5 years, you'll be able to exclude up to $250k of the gain (single), or up to $500k (married filing joint). If you do not meet the 2-out-of-5-years qualification, you will be allowed a prorated gain exclusion because of the loss of your job. Unemployment Compensation - if you receive Unemployment Compensation after the loss of your job, note that it will be taxable. Check out our blog on unemployment benefits for more information about this topic. Although losing your job can be overwhelming, you don't have to navigate the tax-related piece alone. To learn more about how these issues could potentially affect your individual situation, schedule a free consultation call with us.