Taxes 2023: What Does a Layoff Mean For Your Taxes?
Layoffs were an unfortunate reality for many people last year. According to Trading Economics, employers planned to cut 363,824 jobs in 2022. In November alone, 76,835 jobs were lost. The tech sector was one of the hardest hit industries, but others experienced mass layoffs including those working in automotive, financial services and real estate.
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The loss of a job is not only frustrating, but it can also have far-reaching implications, particularly for your taxes. As you begin to gather your documents for the upcoming tax season, you will want to pay close attention to any money you received as a result of your layoff, such as unemployment benefits or severance pay. Any income you collected can directly impact your refund or the amount you owe.
We asked experts from around the world to weigh in on what a layoff means for your 2023 taxes. Here’s what they said.
How Would a Layoff Impact Your Taxes?
Andrew Lokenauth, tax specialist and founder of Fluent in Finance, says, “The main way it will impact your taxes is through your income. When you were laid off, you likely had a reduction in income, which can affect the amount of taxes you owe or the refund you receive.”
He continues, “Additionally, if you collected unemployment or received severance pay, these amounts will also be considered as income and will be subject to taxes.” It is important to remember that any income that you receive should be reported on your tax return, regardless of whether it was the result of a job loss.
What Happens if a Person’s Income Is Reduced or Increased?
“If your income is significantly reduced from being laid off, then there is a high chance that you may end up qualifying for tax benefits such as the child and dependent care credit or the earned income tax credit. However, you also need to keep in mind that lump-sum severance packages can create a huge tax liability since they may end up placing you into a higher tax bracket,” says Lucia Jensen, CEO of WeLoans.
She suggests, “You can often minimize the tax burden by contributing the money into an individual retirement account or 401(k). Alternatively, you can also strategically spread out the tax liability by dividing your severance into multiple payments across separate calendar years.”
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What if You Received Unemployment Benefits?
Miles Brooks, CPA and director of tax strategy at CoinLedger, notes, “On your federal tax return for 2023, you must include any benefits for unemployment that you got in 2022 as taxable income.”
Lokenauth agrees stating, “When it comes to unemployment benefits, it’s important to note that these are considered taxable income. This means that you will need to report the amount of unemployment benefits you received on your tax return and pay taxes on them.”
What if You Received Severance?
Brooks states, “Any cash received as part of the package is taxable income, and you must include it in your 2023 federal tax return. The organization that paid you should send you a form 1099-G, which will list the total benefits you got for the year. You’ll need to disclose the information on this form when you file your taxes, so please keep it.”
Lokenauth adds, “As for severance pay, this is also considered taxable income and will need to be reported on your tax return. However, if you received a severance package that included a lump sum payment, it’s important to note that this may be eligible for capital gains tax treatment. This means that you may be able to pay a lower tax rate on this income than you would on regular income.”
What if You Were Looking for a Job in 2022?
“On your federal tax return for 2023, you can write off some costs associated with your job hunts, such as the price of creating your CV and getting to job interviews,” suggests Brooks.
Jensen concurs. She says, “Before filing your returns, you should also remember that things like travel expenses for a new job, resume preparation costs, as well as employment and outplacement agency fees are tax deductible.”
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What Should Someone Know About Filing Their Taxes After a Layoff?
According to Lokenauth, “When it comes to filing your taxes, it’s important to keep accurate records of your income and any deductions you may be able to claim. This includes any unemployment benefits or severance pay you received, as well as any expenses related to job hunting or career development.”
Brooks notes, “Your taxable income may increase if you include unemployment benefits or severance as taxable income on your federal tax return, which could lead to a higher tax obligation. This implies that you might owe more in taxes or get a lower refund than you normally would.”
If you are unsure about how to file your taxes or what should be included as income after being laid off in 2022, it is strongly recommended that you speak with a qualified tax professional.
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This article originally appeared on GOBankingRates.com: Taxes 2023: What Does a Layoff Mean For Your Taxes?
