|
|
|
|
| The Basics | How the tax code can help you in a layoff
|
A layoff is no fun, but Uncle Sam is here to help ease your pain a bit. The key to get the most from is to be realistic and plan ahead.
By Jeff Schnepper
Few things are as stressful as losing your job, especially when you have a family to support. You have to weather the shock, overcome the feelings of humiliation, and then go through the hard and time-consuming work of finding a new job.
Its been especially tough in the last few years with recession, the aftermath of the Sept. 11, 2001 terrorist attacks and massive corporate downsizing.
Layoffs are still coming, and, if you think you might be one of the casualties, start planning now.
Luckily, you have an ally: the Internal Revenue Service. The tax code can help ease the pain of a layoff.
The tax code, however, wont solve your problems. You do have to pay taxes on any unemployment compensation you receive from your state. The IRS doesnt care how many mouths you have to feed or whether youre defending an eviction notice. Youve received income, and they want a piece of that pie.
If all the income youre getting during the year is from unemployment, your personal exemption and standard (or itemized) deduction should wipe out any tax liability. But, in most cases, your unemployment income is added to your other income during the year and creates an increased potential tax liability.
And, to compound the problem, most states dont normally provide for any federal tax withholdings with unemployment payments. If the unemployment is your only source of cash flow, you probably dont want any withholdings anyway. (To see if your state will withhold federal taxes, check with your unemployment office.)
But heres where the tax code can, in fact, help out with smart planning.
Deductible: Home equity line of credit interest
The first thing Id do now, if not yesterday, is get a home equity line of credit. Negotiate that line before you receive a pink slip. A line of credit is a lot easier to get when youre employed.
But dont use the credit! Not yet anyway. This line of credit should be viewed as your emergency source of cash. In many states, there are no fees to set it up, and you dont start paying any interest until you actually access the dollars.
The good news is that the interest on home equity borrowings, up to the interest on as much as $100,000 borrowed, is allowable as an itemized deduction. Its reflected on Schedule A as an interest expense.
Deductible: Job hunting costs
Its best to have your employer pay for your job hunt expenses. But, if the employer wont, your costs are allowable deductions.
Unreimbursed trips for job interviews, the costs of resumes, phone calls, mileage and any other expenses you incur in hunting down that new position are allowed as itemized deductions. They are reported on Schedule A, as miscellaneous itemized deductions. The sum of all such deductions is subject to the reduction of 2% of your adjusted gross income.
You dont have to be unemployed to get these deductions. They are allowable even if youre still working at your current job. Remember the importance of planning ahead.
And dont forget: if you have to move, those expenses are deductible, subject to meeting IRS standards on time and how far you move. (For more, see "On the move? Watch for deductions.)
Tax-free: Outplacement assistance
Next, as soon as you receive that lay off notice, ask for outplacement assistance and resources to conduct your new job search. While any severance pay you receive will be taxable, outplacement assistance as a company fringe benefit should come to you tax free.
Negotiate to keep the services of your secretary (if you have one) and the use of your office and phone to help you find a new job. Unless youre let go for cause, most companies feel some guilt in letting go a good employee. Use that guilt to get the resources you need to find that new job. Besides, neither you nor your employer knows whether or when you may be working together in the future.
Tax-free: Matching funds in a 401(k)
If youre getting severance pay, find out if you can continue to make contributions to any 401(k) or other retirement account. If youre vested and youll get a company match, then definitely continue the contributions.
The company match is free money. Even if you have to make retirement plan withdrawals for cash flow, make sure you get all the matching funds you can. Withdrawals will be taxed, and you may have to pay an early withdrawal penalty. But, even with the tax, youll always be ahead of the game to the extent of a company match.
One note: If theres no match, and you have no job, you might as well stop contributing. Youre going to need the cash.
Tax-free: Flexible spending plan dollars
Heres an idea that most people miss. You and I call it a planning strategy. Your former employer would probably call it a loophole.
Many workers contribute pretax dollars to an employer-sponsored flexible spending account (sometimes called a salary reduction plan) for health care expenses such as orthodontia and prescriptions. The plan then reimburses workers for those expenses. You can use all of your expected contribution for the year even before youve made your full annual contribution. Your employer must reimburse or pay those qualified expenses, even though you havent yet put the dollars in the tax free pot -- and won't, once you're laid off.
So, if you see a lay off coming, start spending those dollars. Once youve been laid off, you can only make claims for dollars that have already accumulated in the account. Once more, planning ahead provides you with added protection in your time of need.
The time the average jobless worker remained unemployed was 16.8 weeks according to Bureau of Labor Statistics data released last month. That was down from 19.2 weeks in January 2005.
Many job searches take even longer. Nearly 16% of unemployed workers 1.1 million people have been out of a job for more than six months.
Losing one job, and finding another, is never an easy task. Fortunately, if you plan in advance, the tax code can lessen some of your financial pain.
|
|
|
|
