Tax Breaks May Ease the Financial Trauma of Job Loss

Be Opportunistic About Unemployment

Date: March 26, 2010

Contact: Paul Golden 303-224-3514, [email protected]

DENVER—More than 14 million Americans are out of work, according to the Bureau of Labor Statistics. In 2009, nearly three-fourths of companies reduced their employee rosters1. If you are among those who have lost a job, tax season may present an opportunity to alleviate some of your financial distress.

"Losing a job is one of life’s most traumatic events because of both the financial and psychological  impact," says Brent Neiser, CFP® and director of Strategic Programs and Alliances for the National Endowment for Financial Education. "During this time of uncertainty it’s important to stay on top of your finances. There are tax benefits available that just might lessen the misery of unemployment."

Help from Uncle Sam

Unemployment compensation is normally taxable, but this year the government is giving you a small break. Up to $2,400 of your unemployment compensation for 2009 will not be counted in your gross income. If your spouse also is, or was, unemployed, you both qualify for the credit. Read five important facts about your unemployment benefits.

With unemployment compensation it’s important to remember that just because you are receiving government benefits it doesn’t mean you are exempt from paying taxes. When you filled out your Form W-4V, you may have elected that a percentage of your unemployment compensation be withheld for federal taxes. If you did not establish withholding in the beginning, be aware that you are required to report the income and pay the tax. Read more on unemployment compensation and withholding.

Be sure to also include any additional compensation when you file. This includes severance pay or cash payments for accumulated sick leave or vacation, which must be included in your gross income for tax purposes. Any such income should be reported on the Form W-2 you receive from your former employer for the year.

If your 2009 earnings were reduced (from previous years) due to a job layoff, you may be eligible for the Earned Income Tax Credit (EITC). To qualify for the EITC you must have earned income from employment, self-employment or another source and meet certain rules. Unemployment benefits are not considered income for purposes of qualifying for the EITC. Read more about the basic qualification rules for EITC.

"Many people may be unfamiliar with the EITC because they have made good wages in the past and have exceeded the income limits," Neiser says. "But it’s worth checking to see if job loss makes you eligible for this helpful tax credit."

Additionally, for workers who’ve lost their jobs, the American Recovery and Reinvestment Act has established an employer-provided subsidy on COBRA health insurance premiums. Eligible individuals pay only 35 percent of their premiums and the remaining 65 percent is reimbursed to the coverage provider through a tax credit. To qualify, individuals must have been involuntarily terminated from employment between September 1, 2008, and February 28, 2010. The administrator of the health plan is to notify assistance-eligible individuals of this reduction. For more information on this subsidy, including questions and answers for employers and employees, visit the COBRA pages on

Job Search Benefits

Expenses related to a job search may be tax deductible, whether or not your search is successful, as long as you’re seeking new employment in the same line of work. Examples of deductible expenses include:

  • Typing, printing and mailing resumes
  • Long-distance phone calls, postage and fax transmissions
  • Travel and transportation expenses connected with the job search
  • Employment agency fees

Job-hunting expenses are grouped as a "miscellaneous itemized deduction." You can claim the amount of expenses that is more than 2 percent of your adjusted gross income. For more information, see IRS Publication 529.

Moving expenses also may be deducted if you are successful in your job search and it requires a move of at least 50 miles from your current home to your new job location. For more information, see IRS Publication 521.

Looking for Extra Cash?

It’s preferable to keep tax-sheltered retirement funds intact and working for your future, if you can afford to do so. But if you’re still struggling, withdrawing cash may help to tide you over until you find another job. You can tap retirement funds without the usual 10 percent penalty if you:

  • Are age 55 or older when you lose your job
  • Establish a schedule of regular withdrawals over your lifetime or the joint life expectancy of you and your beneficiary, or
  • Take no more from an Individual Retirement Account (IRA) or 401(k) than the amount covering deductible medical expenses (which exceed 7.5 percent of your adjusted gross income), whether or not you itemize your deduction for the expenses. For more information, refer to IRS Publication 575.

"Once you are re-employed, use 401(k) catch-up strategies, if eligible, or contribute to an IRA to make up any savings you withdrew while unemployed," says Neiser. "It’s better to have the cash, no matter how little, invested in a tax-deferred plan for your future."

For a rundown of the tax impacts of job loss, read IRS Publication 4128. Recently laid off? You may be confused about your options. Here is what to do when you’re unemployed.

Whether you’re an early-bird filer or an April procrastinator, there’s a lot to be aware of this tax season. Changes in your life and alterations to the tax laws will affect how you file. Stay up-to-date by visiting us each week through March. Visit NEFE’s tax series at

1 Human resources consulting firm Towers Watson, 2010.



  • Paul Golden

    Media Relations Director

    Direct: 303-224-3514
    Cell: 303-918-3620
    [email protected]