Ways To Save on Your Taxes If You are Laid Off
If you've been following the news recently, you're no doubt aware of a massive round of layoffs that struck one of the most popular social media sites in existence, Twitter. Under the direction of new owner Elon Musk, it was estimated that as many as 3,700 people lost their jobs with more expected to be on the horizon.
While Twitter may be the most notable example of mass lay-offs, they are hardly the only company going through this right now. The online payment organization Stripe recently laid off 14% of its workforce. Social media company Meta is anticipated to be planning "significant" job cuts that could take place in weeks. The list goes on and on.
But for as difficult as losing your job can be, one area that you don't want to forget about has to do with the income tax implications of such an event. Note that there are still steps that you can take today to save money on your taxes in the event that you've been laid off - you'll just need to keep a few important things in mind along the way.
Saving on Your Taxes When Laid Off: Breaking Things Down
The most important step that you can take to save money on your taxes if you are laid off involves making sure that you fully understand the situation you now find yourself in.
Severance pay, for example, is a term that describes any money that an employer pays to an employee after a layoff has occurred. Many people don't realize it but severance pay is fully taxable in the year that you receive it. It is still subject to Social Security and Medicare taxes, federal and state income tax withholding, and more. The same is true of any unemployment compensation that you receive, as well as the money you receive from benefits like sick days or paid time off that you didn't end up using.
Can a Health Savings Account Help Cut My Tax Bill?
One way to minimize that tax as much as possible involves putting it into your Health Savings Account, otherwise known as an HSA for short. As the name implies, these are accounts that are specifically used to cover medical expenses that you may incur in the future. As of 2023, you can put up to $3,850 for self-only coverage and $7,750 for family coverage into an HSA without getting taxed so long as it is eventually used for those purposes.
Can My Deliverance Fund My IRA?
Along the same lines, if you're in a position to do so, you could also make the largest contribution to any retirement funds that you can. If you have an IRA, for example, for 2023, you can contribute up to $6,500 a year and enjoy similar tax-related benefits. Suppose you're over the age of 50, that number increases to $7,500. Note, however, that any money you contribute will not be taxed until you formally retire - which means that you can't withdraw it without incurring a penalty, either.
Lump Sum Severance Versus Longer Payout
One method that people sometimes use to minimize their tax liability after losing their job involves negotiating just how they receive severance with their former employer. Rather than getting paid out in one lump sum (meaning that you'll be taxed on the entire amount the following year), you could see if that severance package can be spread out over multiple years. Although the amount of money you'll pay in taxes will likely remain the same, the actual obligation will be smaller in the short term - which may be exactly what you need to help land on your feet again.
Don’t Forget to Roll Over Your 401k to Your IRA
IRAs are a great way to save for retirement if you're not tied down by an employer. They also allow flexibility in the event that your circumstances change or when deciding how much money is enough. Contact your 401k provider for rollover instructions.
Know When Your Health Insurance Runs Out
The Consolidated Omnibus Budget Reconciliation Act (COBRA) provides workers who've lost their job with up to 18 months of health insurance coverage through their previous employer's plan. However, that is expensive. You might want to shop around for alternatives.
Be Careful With Your Spending
When times are good, it's easy to spend money without thinking about the consequences. We know that our monthly mortgage or rent and car payments are due every month - but how much do we actually focus on what goes into daily spending? What is your weekly grocery bill like for food items alone...and don't forget utilities. Being more aware of these choices will help you make better decisions when shopping and budgeting for reduced cash flow.
Understand Your Severance Tax Implications
In the end, getting laid off is an unfortunate situation that can be stressful to find yourself in. But you also don't need to let the process of filing for taxes contribute to this difficult time. By understanding the precise tax implications of getting laid off, you can make sure you're on the most stable ground possible moving forward.
If you'd like to find out more information about ways that you can save on your upcoming taxes in the event that you are laid off, or if you'd just like to discuss your current situation with someone in a bit more detail, contact us today to speak to a professional.