Downsizing Companies Can Create Tax Burdens for Many
It’s bad enough to lose your job – it hardly seems fair that you also have to worry about the tax consequences that come along with it. But that is exactly the predicament that thousands of Georgia residents may be facing according to a recent article in the Atlanta Journal Constitution. If you are one of those impacted by impending job cuts at EchoStart Technologies in Atlanta or any of the other companies warning of downsizing, then you need to know how it will affect your tax status. Here are the major elements that you need to be aware of and prepare for:
- Unemployment Compensation – If you are laid off and find yourself unable to find a job immediately, you are likely to be eligible for unemployment compensation. Though many people believe these benefits are tax free, that is not correct: the federal government expects to be paid taxes on this in the same way that they do income, and your state may as well.
- Severance – Many companies that lay off personnel offer severance pay to help their employees. Layoff actions also generate payment for unused vacation time and sick time. These payments are considered income in the same way that your paychecks were, and will appear on your W-2 for tax purposes.
- Employer Pension Plans – If your employer provided you with a pension plan as part of your employment, there are a couple of different options for its disposition after you are laid off. Some plans will allow you to either leave the funds where they are or move them into a different IRA account. You are also permitted to take a distribution of the funds yourself and then deposit them into another IRA within 60 days of disbursement. The problem with doing this is that the federal government requires employers to withhold 20% of this type of distribution and submit it to the IRS. That leaves you with significantly less money that you can deposit into your own IRA.
Additionally, you will have to make up for the 20% difference yourself, or else face additional taxes on the 20% that is no longer bundled in the amount being deposited. Taking advantage of the rollover option may make sense, but you need to be careful that you don’t mix the funds in with other IRA accounts – they have to be kept separate. It is important to remember that if you should choose to simply take the cash, you will be subject to tax on the distribution. Depending on your age, you may also be subject to a penalty of 10% for taking a withdrawal before the age of 59 ½.
- Job Search Expenses – Writing off job search expenses is a little known benefit available to those who lose their job. As long as your job search is limited to positions that are in the same occupation, you can deduct them – even if you are not successful. The expenses that can be written off include resume preparation costs, including typing, printing and mailing; transportation and travel costs if you look for a job outside of your immediate area (even if job search is not the primary reason for the travel, you can write off any expenses incurred in looking for a job while you are away); and any fees you pay for job counseling services, career counseling, or to placement agencies.
- Moving Expenses – If you find a job that requires you to move from your current home, many of your moving expenses can be deductible. These including the cost of a moving van or truck rentals, packing, shipping, in-transit storage and insurance for your property. Remember that this type of expense can only be written off if your move is a minimum of 50 miles from where you lived before. There is also a requirement that specifies that you work in the new location for at least 39 weeks of the first year in your new residence/locale.
- Home Sale – Similar to the costs of relocation, if you have lived in your home for at least 2 of the last five years and end up having to sell it, you may realize a gain on the sale of the house. If you are single you are eligible to exclude up to $250,000 of that gain, and if you are married and both of you are eligible for the exclusion, you can exclude up to $500,00 of the gain. Even if you haven’t lived in your home for the required two years, if your home sale was related to a job loss then you are permitted to take advantage of the exclusion on a prorated basis.
- Health Insurance – Health insurance has always been an important issue to address when a job loss occurs and employer health benefits are lost, but with the passage of the Affordable Healthcare Act it has become even more significant, as failure to secure health insurance can result in a tax penalty. Employees in this position have a number of different options, including taking advantage of special access to the health insurance marketplace or accessing COBRA coverage.
Though access to the health insurance Marketplace is generally restricted to a specific enrollment window, enrollment is accessible to those who have lost their job. Assistance with paying for the health coverage may be available if you qualify for the premium tax credit.
COBRA stands for the Consolidated Omnibus Budget Reconciliation Act, which requires employers to provide the opportunity for continued healthcare coverage that would have been lost based on a job loss. This coverage extends not only to the employee, but also to their dependent children, their spouse, and even their former spouses. COBRA is generally more expensive for former employees than it was when they were active employees, as administrative costs for the program can bump the price up. It is also important to remember that COBRA is generally only available for a period of 18 months, and is only applicable to employers in the private sector who have 20 or more employees. Coverage may also be available to employees of state or local governments if those organizations offer their employees group coverage.
Though these issues may seem overwhelming, making sure that you are aware of each of them and have taken appropriate actions will help prevent you from getting into tax trouble down the road. If you need assistance or have any questions, don’t hesitate to contact our office to set up an appointment to discuss your situation.
Do you need some help with your tax problems? Give us a call at (770) 474-0464 and let us handle the IRS!