It is never an easy ordeal, losing your job, whether emotionally or financially. Regardless, it is crucial to continue to be proactive regarding your finances and tax status. If you became unemployed recently, these are some steps to take and their tax implications.
Start Your Job Hunt
As soon as you lose your job, you should begin your search for another immediately, even though you'd instead not at that point. Also, review your professional milestones as early as possible and update your portfolio or resume.
In ideal circumstances, you should find a new job in your field within a reasonable period of searching. Still, if you feel it will take longer than you are comfortable with, you should consider something temporary, a gig, or a one-time project.
Do Not Cash In Your 401(k)
There is often the drive to liquidate your assets when you lose your job suddenly to create financial breathing space. This is very advisable as there are likely some taxes and considerable penalties.
Alternatively, you could roll your 401(k) into an IRA to keep your money tax-deferred. Or you could switch it to a Roth IRA to create more investment options for you. But the amount rolled will be taxed.
You could also leave it with your last employer, where it will continue to be tax-deferred, but your employer won't keep matching your 401(k) contributions.
Don't cash in your 401(k) without thorough consideration of whatever you choose to do.
Apply for Unemployment Benefits
If you become unemployed due to factors you have no control of, you could be qualified for unemployment benefits and should put in your application as quickly as possible. You could even receive employment benefits in some instances though you got fired.
However, make sure you visit the unemployment insurance division to find out more. The little income you get from them can cover some expenses till you get a new job.
The downside to this is that unemployment aids are also taxable income. You can have your taxes withheld from them, but if you opt not to withhold them, you may end up owing the IRS a considerable amount in the next tax season.
Consider Your Options For Healthcare
If your health coverage was lost with your previous job, COBRA should have provisions that give you a range for as long as 18 months. You may have to pay a more significant part of your insurance charge or everything, but you'll have health coverage for your job transition period.
But if you are self-employed or a freelance contractor, you should have tax-deductible health insurance charges. Your spouse could instead add your health coverage, but they must run it through their HR and know their choices before doing this.
Amend Your Monthly Allowance
This may seem obvious, but it's easy not to stick to it since you have gotten used to the lifestyle your previous salary afforded you. So it's important to break those spending habits and readjust.
Even though you've never had a budget, you can create one for yourself now. Excel spreadsheet works fine, or you can search for other tools like Mint or YNAB. Make sure you include items your employment may have been covering, like healthcare, housing, or a car. Be very detailed and create a field expense related to tax or savings.
The tips listed above should help you navigate tax issues that may come up during your job transition period. Contact employment tax experts if you're seeking help with tax relating to your employment status. Some of them offer free consultations.
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Jim McClaflin, EA, NTPI Fellow, CTRC