If you lost your job during the past year, do you know your tax obligations? The Pennsylvania Institute of Certified Public Accountants (PICPA) answers some common tax questions for those who are out of work.
Is My Severance Package Taxable?
If you received severance pay from your former employer, that pay is considered taxable income. It will be included on your W-2 form, and your employer will withhold taxes on it. Similarly, if your former employer compensates you for the value of accumulated vacation or sick days, or other types of leave, that compensation is also taxable. Even companies that go out of business or declare bankruptcy must report your wages and withholding and send you a W-2 form that shows all your income earned. Of course, you must pay taxes due on wages you earned before you lost your job. For wages earned in 2011, you should have received a W-2 from your employer by Jan. 31.
Will I Be Taxed on Unemployment Insurance?
Yes, you will have to pay taxes on state unemployment insurance benefits and any extended benefits you collect. You can ask the state to withhold your taxes for you, just as your employer did, so you don’t have a tax bill waiting for you at filing time. If you qualify for public assistance or food stamps, you will not have to pay taxes on those benefits. You do not have to pay state income taxes on unemployment benefits in Pennsylvania.
What If My Family Helps Me Out?
There are special rules that address the taxation of gifts. Generally, each taxpayer is allowed to give another individual up to $13,000 annually without paying taxes on that gift.
What if I Dip into My Retirement Money?
As a general rule, any money you withdraw from your retirement plan or IRA will be taxed in the year of the withdrawal if you have not yet reached eligible retirement age (generally age 59 ½) and don’t roll that money over into another qualified retirement account within 60 days. If you took $10,000 from an IRA in 2011, for example, you’ll have to pay taxes on it when you file this year. In addition, if you have not yet reached eligible retirement age, you’ll also owe a 10 percent penalty for early withdrawal. CPAs strongly advise against raiding your retirement account. There are hardship exemptions if you’re permanently disabled or have certain medical expenses, so check with your CPA for more information if you believe you qualify. Note, if you want to withdraw any IRA contribution you made in 2011, you can do so without tax or penalty as long as you did not take a deduction for the contribution and you do not withdraw any interest or earnings you made on that contribution.
Are Job Hunting Expenses Deductible?
Yes, you can deduct many types of costs, including résumé preparation and mailing expenses, employment agency fees, related travel outlays, as well as some moving costs if you relocate to start a new job.
What if I Can’t Pay My Taxes?
If you can’t pay your tax bill, get in touch with the IRS immediately and explain your situation. The IRS typically has payment plans available for those who are suffering financial hardship and having a hard time covering their tax bills. You can find more information at (800) 829-1040 or online at www.irs.gov. If you continue to have trouble settling your tax problems, contact the Taxpayer Advocate Service at (877) 777-4778.
Your CPA Can Help
No matter what your financial situation, your local CPA has the expertise to cut through the complexity and explain your options in language you can understand. Be sure to turn to him or her with all your financial questions. To find a CPA by location or area of expertise, visit www.IneedaCPA.org.
The CommonWealth Tips columns are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.
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