Tax Impact Calculator

Understanding Taxes After Job Loss

Losing your job has significant tax implications. Severance pay, unemployment benefits, and changes to your income all affect your tax situation. Understanding these impacts helps you plan and avoid surprises at tax time.

How Severance Pay is Taxed

Severance pay is considered supplemental wages and is taxed as regular income:

• Federal withholding: Employers typically withhold a flat 22% for federal taxes (37% for amounts over $1 million)
• FICA taxes: Social Security (6.2%) and Medicare (1.45%) taxes apply
• State taxes: Your state's income tax rate applies
• Local taxes: City or county income taxes may apply in some areas

The lump sum problem: If you receive severance as a lump sum in the same year as your regular salary, it may temporarily push you into a higher tax bracket. However, this often evens out—you're only taxed at the higher rate on the amount in that bracket, not your entire income.

Are Unemployment Benefits Taxable?

Yes, unemployment benefits are taxable income. Key points:

• Federal income tax: Always applies to unemployment benefits
• State income tax: Most states tax unemployment; a few exempt it
• Optional withholding: You can choose to have 10% withheld for federal taxes
• Form 1099-G: You'll receive this form documenting benefits received

Common mistake: Many people don't have taxes withheld from unemployment and are surprised by a tax bill. If you're receiving unemployment, consider opting for withholding or making estimated payments.

The Lump Sum Tax Impact

When severance is paid as a lump sum, here's what happens:

• The employer withholds 22% for federal taxes (flat rate for supplemental wages)
• This may be more or less than you actually owe depending on your total income
• If 22% is too little, you'll owe money at tax time
• If 22% is too much, you'll get a refund

Estimated Tax Payments

If you don't have enough tax withheld, you may need to make quarterly estimated payments:

• When required: If you expect to owe $1,000+ in taxes after withholding
• How to pay: Use IRS Form 1040-ES or pay online at IRS.gov
• Quarterly deadlines: April 15, June 15, September 15, January 15
• Penalty avoidance: Pay at least 90% of current year taxes or 100% of prior year

States With No Income Tax

If you live in one of these states, you don't owe state income tax on severance or unemployment:

• Alaska, Florida, Nevada, New Hampshire*, South Dakota, Tennessee*, Texas, Washington, Wyoming

*New Hampshire and Tennessee tax investment income only, not wages

Tax Strategies After Job Loss

1. Maximize deductions: Job search expenses, moving costs (if relocating for work), and professional development may be deductible
2. Contribute to retirement: If you have earned income, contribute to a Traditional IRA to reduce taxable income
3. Consider Roth conversion: If your income is lower this year, it may be advantageous to convert Traditional IRA funds to Roth
4. Harvest tax losses: If you have investments with losses, selling them can offset gains or up to $3,000 of ordinary income
5. Defer income if possible: If you can negotiate receiving some severance next year, it may reduce your tax burden

When to Consult a Tax Professional

Consider consulting a CPA or tax advisor if:

• You received a large severance package ($50,000+)
• You have stock options or RSUs that vested or were accelerated
• You're considering retirement account rollovers or distributions
• You have complex income from multiple sources
• You're self-employed or starting a business
• You're unsure about estimated tax payments