Losing a Job

Updated for Tax Year 2017


OVERVIEW

Leaving a company? In between jobs? TurboTax handles taxation of separation pay, writing off job-search expenses, and more.


Separation pay and other compensation

You may not think of it as pay, but it is to Uncle Sam, who can lay claim to a portion of any severance or unemployment compensation you receive. Also taxable are payments from your former employer for any accumulated vacation or sick time, so be sure that enough taxes are withheld from these.

Watch for that final W-2 form from your former employer as well. The company isn’t required to send it to you right away, but must provide it by January 31 of the year after you leave the company—the same deadline as if you were still employed by the firm.

Unemployment benefits

Unemployment benefits are considered taxable income and must be reported on your federal tax return. They are not necessarily taxed by your state. At the end of the year that you received the unemployment benefits, you'll receive a form 1099-G, reporting what you've been paid. You'll need this form when preparing your taxes.

For future payments, you have the option to have tax withheld from your unemployment checks, which can help you avoid having a large tax bill at tax time. Fill out Form W-4V to have 10 percent of your benefits withheld for federal income taxes. You can do this by typing your information directly on the form online, but then you need to make a copy and sign it. Send it to your state unemployment office.

Health insurance

If you leave your job, a federal law commonly known as COBRA (Consolidated Omnibus Budget and Reconciliation Act) requires your employer to let you stay on the company's policy for up to 18 months after you depart. (Note: The law doesn't cover firings for gross misconduct.)

If you're healthy, you may find cheaper premiums than what you'd spend on a COBRA policy. And if you get a high-deductible policy (at least $1,200 for an individual or $2,400 for a family), you may qualify to set up a health savings account (HSA), which lets you make tax deductible contributions and withdraw the money tax-free for qualified medical expenses.

Job-hunting expenses

Job-hunting costs are part of miscellaneous expenses reported on Schedule A of Form 1040. And miscellaneous expenses are deductible only to the extent that they exceed 2 percent of your Adjusted Gross Income.

Retirement savings

Keep your hands out of that retirement cookie jar! If you lose your job, resist the temptation to dip into your 401(k) account. At any age, cashing in your 401(k) means paying tax on every dime you withdraw, unless you've made after-tax contributions. Even worse, if you’re under age 55 when you leave your employer and begin taking withdrawals, you’ll also be hit with a 10 percent tax penalty. And keep in mind that short-circuiting your retirement savings could be disastrous for your long-term financial health.

If you have more than $5,000 in your 401(k) account, you can leave your money with your former employer, where it will continue to grow. However, you may be better off transferring your 401(k) balance to an IRA, where you would have almost unlimited investment options, or to your new employer's 401(k) plan if it accepts rollovers.

Ask your former boss to send your retirement money directly to the new account. If you request that the money be paid to you, with the intention that you’ll personally deposit it into the new plan, the law requires your former plan sponsor to withhold 20 percent of your money for the IRS.

If part of your 401(k) is invested in your company’s stock, be sure to check out the special rules for net unrealized appreciation—a mouthful of a tax term that could save you money.

TurboTax will help you deal with tax issues related to losing a job—and help you get the biggest possible tax refund.

Get every deduction you deserve

TurboTax Deluxe searches more than 350 tax deductions and credits so you get your maximum refund, guaranteed.

For only $59.99$39.99*
Start for Free

Looking for more information?

The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.


Security is built into everything we do
Here's how
* Important Offer Details and Disclosures
  • TURBOTAX ONLINE/MOBILE

  • Try for Free/Pay When You File: TurboTax online and mobile pricing is based on your tax situation and varies by product. Absolute Zero $0 federal (forms 1040EZ/1040A) + $0 state limited time offer only available with TurboTax Free Edition; offer may change or end at any time without notice. Actual prices are determined at the time of print or e-file and are subject to change without notice. Savings and price comparisons based on anticipated price increase. Special discount offers may not be valid for mobile in-app purchases.
  • QuickBooks Self-Employed Offer with TurboTax Self-Employed: To receive your complimentary subscription to QuickBooks Self-Employed through 4/30/19, you must pay for your 2017 TurboTax Self-Employed return by 4/17/18 and sign-in and access your QuickBooks Self-Employed account via mobile app or at https://selfemployed.intuit.com/turbotax at least twice by 7/15/18. You will have the option of renewing your QuickBooks Self-Employed subscription by 4/30/19 for another year at the then-current subscription rate. You may cancel your subscription at any time from within the QuickBooks Self-Employed billing section. See QuickBooks.com for price comparison. Offer not valid for existing QuickBooks Self-Employed subscribers already on a payment plan.
  • Pays for itself (TurboTax Self-Employed): Estimates based on deductible business expenses calculated at the self-employment tax income rate (15%) for tax year 2017. Actual results will vary based on your tax situation.
  • Anytime, anywhere: Internet access required; standard data rates apply to download and use mobile app.
  • Fastest refund possible: Fastest tax refund with e-file and direct deposit; tax refund time frames will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice.
  • TurboTax Help and Support: Access to a TurboTax specialist is included with TurboTax Deluxe, Premier, Self-Employed and TurboTax Live; not included with Free Edition (but is available as an upgrade). TurboTax specialists are available to provide general customer help and support using the TurboTax product. SmartLook on-screen help is available on a PC, laptop or the TurboTax mobile app. Service, area of expertise, experience levels, wait times, hours of operation and availability vary, and are subject to restriction and change without notice.
  • Tax Advice, Expert Review and TurboTax Live: Access to tax advice and Expert Review (the ability to have a Tax Expert review and/or sign your tax return) is included with TurboTax Live or as an upgrade from another version, and available through October 15, 2018. These services are provided only by credentialed CPAs, EAs or tax attorneys. State tax advice is free. Some tax topics or situations may not be included as part of this service, which shall be determined in the tax expert’s sole discretion. In the event your return is reviewed by a tax expert and requires a significant level of tax advice or actual preparation, the tax expert may be required to sign your return as the preparer at which point they will assume primary responsibility for the preparation of your return. Expert Review [and TurboTax Live] not available on the TurboTax mobile app or when using a web browser on your mobile phone. On-screen help is available on a PC, laptop or the TurboTax mobile app. Service, area of expertise, experience levels, wait times, hours of operation and availability vary, and are subject to restriction and change without notice.
  • Tax Return Access and My Docs features: Included with TurboTax Deluxe, Premier, Self-Employed, TurboTax Live or with PLUS benefits. Access to all tax-related documents we have on file for you is available through 10/31/2019. Terms and conditions may vary and are subject to change without notice.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2016 TurboTax products.
  • Most Popular: TurboTax Deluxe is our most popular product among TurboTax Online users with more complex tax situations.
  • CompleteCheck: Covered under the TurboTax accurate calculations and maximum refund guarantees.
  • #1 rated online tax prep provider: Based on independent comparison of the best online tax software by TopTenReviews.com March 13, 2017.
  • Get tips based on your tax and credit data to help get you to where you want to be: Tax and credit data accessed upon your consent.
  • TURBOTAX CD/DOWNLOAD SOFTWARE

  • TurboTax CD/Download products: Price includes tax preparation and printing of federal tax returns and free federal e-file of up to 5 federal tax returns. Additional fees apply for e-filing state returns. E-file fees do not apply to New York state returns. Savings and price comparison based on anticipated price increase. Prices subject to change without notice.
  • Fastest refund possible: Fastest tax refund with e-file and direct deposit; tax refund time frames will vary.
  • Pay for TurboTax out of your federal refund: A $X.XX Refund Processing Service fee applies to this payment method. Prices are subject to change without notice. This benefit is available with TurboTax Federal products except TurboTax Business.
  • About our TurboTax Product Experts: Customer service and product support vary by time of year.
  • About our credentialed tax experts: Live tax advice via phone is included with Premier and Home & Business; fees apply for Basic and Deluxe customers. State tax advice is free. Service, experience levels, hours of operation and availability vary, and are subject to restriction and change without notice. Not available for TurboTax Business customers.
  • #1 best-selling tax software: Based on aggregated sales data for all tax year 2016 TurboTax products.
  • Data Import: Imports financial data from participating companies; may require a free Intuit online account. Quicken and QuickBooks import not available with TurboTax installed on a Mac. Imports from Quicken (2016 and higher) and QuickBooks Desktop (2012 and higher); both Windows only. Quicken import not available for TurboTax Business. Quicken products provided by Quicken Inc., Quicken import subject to change.