Updated to reflect changes to tip #5 under the Tax Cuts and Jobs Act that became law on Dec. 22, 2017.
Regardless of your thoughts, political or otherwise, when it comes to L'affaire Comey, most of us can relate to the recently fired FBI director. Like James Comey, we've at some point been out of job, either by our choice or because we, too, were let go.
If that happens to you, here are five steps to take. And, of course, there are tax implications for each of the post-job moves.
1. File for unemployment.
If you lose your job through no fault of your own, for example, a corporate downsizing, you should be eligible for unemployment. Depending on the circumstances, you may be eligible even if you are fired. No matter why you were let go, check with your state's unemployment benefits office to be sure; eligibility for unemployment insurance, benefit amounts and the length of time benefits are available are determined by state law and vary depending on where you live. If you qualify, apply for unemployment as soon as you can. Even if you get another job quickly, the benefits can come in handy in the short-term.
TAX TIP: Unemployment is taxable income. Yep, it's one of those terrible tax surprises that folks encounter during one of the most stressful times of their lives. You can have taxes withheld from your unemployment benefits, but most people don't because, duh, they're out of a job and need all the money they can get for day-to-day expenses. In that case, you'll need to consider paying estimated taxes on your unemployment amount. (More on these added tax payments in upcoming tip #3.)
2. Review your health insurance options.
If your medical coverage is through the job you just lost, your Human Resources department should provide you with information on continuing your health coverage for at least a while under COBRA. But since that's typically more expensive than what you're used to paying, you also should investigate getting a new policy to cover you while you're out of work.
TAX TIP: If you decide to work independently, either in between jobs or making the permanent switch to self-employment, the insurance premiums you pay could be deductible. You'll find the option to do so directly on Form 1040 as one of the above-the-line deductions.
TAX TIP: If you're married, check to see if you can be added to your spouse's coverage. That's generally allowable in major life change situations. Your husband or wife also should adjust other tax-favored company benefits, such as a medical flexible spending account (FSA), which also can be tweaked when there's a major personal shift such as a spouse's job loss.
3. Create or revise your personal budget.
Even if you get a severance package, that money won't last forever. So you need to address the imminent loss of income and added expenses for things like health insurance (see tip #2) sooner rather than later.
TAX TIP: If you take some contract jobs before returning to full-time employment or go totally solopreneur, make sure your new budget includes estimated taxes (previously mentioned in tip #1). These added payments to the Internal Revenue Service are due on income that, like 1099-MISC earnings, isn't subject to payroll withholding.
4. Roll your 401(k) into an IRA.
Note the advice to roll your company retirement account into another retirement vehicle, not to liquidate it. Even if your new budget shows you're short of cash, you don't want to take money out of your company retirement account unless it's an absolutely necessary, last-ditch, hardship move.
TAX TIP: If you're younger than 59½ and withdraw your 401(k) money, you'll owe not only taxes on the money but an early distribution penalty. Instead, keep your tax-deferred retirement money away from Uncle Sam's immediate clutches by transferring it directly to an IRA. A financial institution or fund company or, if you have one, financial adviser can help you with this. It's generally an easy process, but one with specific steps to take to ensure you don't accidentally trigger any adverse tax reactions.
TAX TIP: You can leave your 401(k) with your old employer. It will continue to earn tax-deferred there, but you'll no longer get the company match. Most folks roll their old 401(k)s into traditional IRAs, but if you qualify you can make an eligible 401(k) rollover directly to a Roth IRA, which means withdrawals in retirement won't be taxed. Remember, though, in this case you'll owe taxes on the amount of pretax assets you roll over.
5. Start looking for a new job.
If you decide you want to jump back into the traditional job pool, that's cool. To help make that happen, get a new email address, especially if your personal one is less than professional. I'm looking at you GoYankees@yahoocom. Then use that new email to alert folks of your new situation.
You also might want to set up a basic website where you can list a short bio and links to your work. Also make the change to your social media pages that you use for professional purposes, such as LinkedIn.
And, of course, you'll want to re-do your resume.
TAX TIP: If all these job search moves lead to you getting another position in the same field, then you can claim them as an itemized deduction on your tax return. Note the same career area requirement. Although losing a job is for many a good time to totally shift employment gears, the tax code won't underwrite your dramatic job change expenses. My post on the 3 requirements you must meet to deduct job-search costs has more on this tax-saving opportunity.
UPDATE, Dec. 22, 2017: When Trump signed the Tax Cuts and Jobs Act into law on this date, the Republican-written tax reform measure eliminated taxpayers' ability to claim job search and other miscellaneous expenses (like union dues for those folks still with jobs that have organized representation) on Schedule A. These work-related write-offs (and others) could return if the GOP tax law individual provisions are allowed to expire, per the law, at the end of 2025.
I hope that if you ever do lose your job, these five tips and their seven associated tax tips can help you quickly quit feeling like the sad Star Wars stormtrooper pictured above.
I also hope that you're not out of work long and the job you do take or create is the one that you really, really want.