Losing your job. It's one of the worst things that can happen, especially when it comes as a total surprise. That's what folks who worked on Roseanne are dealing with after ABC pulled the plug on the rebooted sitcom.
Being out of work is not so high-profile for most of us. But we all share the panic, anger and helplessness of suddenly losing the reason we get up every morning.
To help you get through being let go, here are six steps you can take.
And, of course, there are tax implications (nine total) for each of these 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, the acronym for the federal Consolidated Omnibus Budget Reconciliation Act that created the option for workers to continue their company's group health plan for a time after leaving the job. It applies to employers with 20 or more employees, including self-insured employers. 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'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.
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 for yourself, as well as for your spouse and dependents, could be fully deductible. Yeah, I know. You'll still have to come up with the money, which likely will be more than the employee-only portion that was taken out of your working-for-the-man income. But this tax break is of some help, so don't overlook it. You'll find the option to do so directly on Form 1040 as one of the above-the-line deductions. This amount will bring your total income down to a lower adjusted gross income (AGI) level. In addition to helping reducing your final tax bill, a lower AGI also could help you qualify for other tax breaks.
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 side hustle jobs before returning to full-time employment or go totally solopreneur full-time, 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, like 1099-MISC earnings, that aren'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 or start your own business.
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 GoCubs@yahoocom. Then use that new email to alert folks of your new situation.
You also might want to set up a 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.
If, however, you've decided your job loss is a sign from the work gods that it's time for you to follow your entrepreneurial dreams, great. Setting up a website, new email and business social media precedence works for this career shift, too.
TAX TIP: Under previous tax law, if your job search moves led to you getting another position in the same field, you might could have claimed the associated expenses as an itemized miscellaneous deduction on your tax return. That's no longer an option, thanks to changes made by the Tax Cuts and Jobs Act. Sorry for the bad news, but I wanted to make sure you didn't waste your time tracking these things.
TAX TIP: However, if you've decided to be your own boss as I hinted at in moves #2 and #3, these startup expenses can be claimed on your new business filing, which for most newly self-employed is Schedule C that's filed with your personal Form 1040. That IRS form and its instructions provide a good primer on the types of business costs you can deduct. Just make sure they are ordinary and necessary for your type of business. And keep thorough, and separate, business records.
6. Go back to school.
If you can afford to take some time off from the work world, look into taking some classes that could help you change careers or improve skills that will help you get a future paid position. Yes, it might be a bit uncomfortable being the oldest student in class. But think of all the pop culture references you'll now immediately recognize. And you could offer your younger classmates some perspective on coping post-graduation.
TAX TIP: If you're a parent, you probably are well aware of the many tax breaks for that apply to traditional college student costs. Now's the time to claim one for ongoing education, the aptly-named Lifetime Learning tax credit. This tax break is available not just for higher education costs, but also continuing education courses once you're out of school, such as a class to improve your workplace skills. The Lifetime Learning credit is worth a possible maximum of $2,000. However, that amount is reduced if you make what the IRS considers a lot of money; my inflation adjustments post has 2018 limits. And since it's a credit, it offers dollar-for-dollar tax savings.
I hope that if you ever do lose your job, these six career moves and their nine associated tax tips can help you quickly quit feeling like the sad Star Wars storm trooper 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.
A version of this post ran May 11, 2017.
You also might find these items of interest:
- 4 tax tips for new businesses
- Giving thanks for educational tax breaks
- 3 popular retirement plans for the self-employed