Surprise! If you lost a job in 2021, your upcoming annual interactions with the IRS could be uncharacteristically pleasant.
March 25, 2022
Read the article in Glamour.
Losing a job has become a bit like getting COVID: What was once a thoroughly terrifying prospect now (for the young-ish and generally healthy among us) feels like more of an inconvenience that’s bound to happen, even to those who play by all the rules. In both instances, once you get to the other side intact, there can be some silver linings to be found. Maybe getting through omicron with only mild symptoms let you finally breathe a sigh of relief. Maybe getting let go from a dull-but-stable job empowered you to finally strike out on your own, as you’ve been daydreaming about for years.
If you lost your job for any reason in 2021, your upcoming annual interactions with the IRS could be uncharacteristically pleasant, too. “When it comes to taxes, less is definitely better,” says Angela Anderson, a CPA in Atlanta, GA. “Being laid off, furloughed, or fired means a reduction in income, which equates to lower taxable income, which usually means paying less in taxes.”
If it was a high-paying job that you were let go from, that could be icing on the cake, if one dares use cake as an analogy for taxes. “If you worked for part of the year and withheld taxes on each paycheck you received before you became unemployed, you may have a sizable refund coming because you were likely withholding at a higher tax rate than what you will actually need to pay,” notes Judith Lu, CEO and Founder of Blue Zone Wealth Advisors in Los Angeles. More good news: This tax season, you might be able to take advantage of temporary tax relief introduced via the American Rescue Plan. For example, one upside if you fall into a much lower income bracket than usual is that you may qualify for the Earned Income Tax Credit (EITC), which reduces the amount of federal income tax you owe or gets added to your refund. If you’re a parent, you can also take advantage of the greatly enhanced Child Tax Credit, which was increased from $2,000 per qualifying child to $3,600 per child for children ages 5 and under and $3,000 per child for ages 6 through 17. The tax credit for daycare expenses was also raised, to $8,000, and can include payments you made to summer camps as well as money you spent on daycare so you could go out and job-hunt. “The IRS also allows you to deduct expenses such as job search costs and moving expenses related to taking on a new job,” Lu notes.
Of course, we’re talking about the tax code, so things can’t be quite as straightforward as “make less money, pay less in taxes.” If you went on federal or state unemployment at all in 2021, the same money that helped you get through difficult times may now come back to haunt you (in the form of Form 1099-G, which should have arrived by January 31). “During the pandemic, people have been making more money on unemployment than ever before,” says Shiloh Jackson, CPA and founder of ComplYant. “But here’s the kicker—those payments are taxable. Unless you elected to have tax taken out of your unemployment checks before receiving them, odds are you still owe tax on the money you received last year.” Same goes for government stimulus checks, furlough pay, or severance pay or packages from a company that let you go—including payment for any unused vacation or sick days (all of this information will appear on the W-2 sent to the IRS by the employer). “You have to report that as income when you file your tax return. The only reason you wouldn’t is if your total yearly income is below the filing threshold,” says Armine Alajian, CPA and founder of the Alajian Group in Los Angeles. For 2021, that’s if your income exceeded $12,550 as a single filer or $25,100 as a joint filer. Also worth noting: If you received advance payments on the Child Tax Credit mentioned previously and did not have taxes withheld, you’ll now have to settle up with the IRS on that income, too. (Boo.)
As you gather all your tax documents, you should also keep in mind that even if a company you worked in 2021 for went out of business, they can’t disappear until you’re all squared away for tax time (and unfortunately, the taxes you owe on that income aren’t going to disappear either). “If a company you used to work for closed down during the pandemic, they are still required to file those W-2s and 1099’s on time for you,” Jackson says. If you forgot to roll over a 401K from your previous employer within 60 days and the money was distributed to you, that’s a chunk of income you’ll be taxed on, and you may need to pay an early-withdrawal penalty of 10 percent. (This was not true in 2020 if your early withdrawal was coronavirus-related, thanks to a provision in the CARES act, but the rules are back to normal now). “One exception: If you’re unemployed, you may take penalty-free distributions from your IRA—NOT your 401K—to pay for health insurance premiums, but for the distribution to be eligible for the penalty-free treatment, you must meet certain conditions, like you lost your job or received unemployment compensation for 12 consecutive weeks,” says says Trenda Hackett, CPA and technical tax editor at Thomson Reuters Tax and Accounting in Dallas. Same goes if you sold off your shares of company stock in order to tide yourself over financially between jobs.
Finally, if you transitioned to self-employment after losing your job, you’ll need to get familiar with Schedule C, where you report money made and lost—you’ll attach this to your 1040. Your other new friend will be Schedule SE, which helps you calculate how much social security and medicare tax you owe based on the income you earned (fun!). You can refer to the IRS’s riveting Tax Guide for Small Businesses for answers to all the nitty-gritty questions that are sure to pop up. Keep in mind that now that you’re self-employed, you may be able to deduct what you spend paying for health insurance.
Long story short: If you lost your job in 2021, your tax return will likely look very different, especially if you were previously a full-time, W-2 employee and could basically just crib the info from one year’s 1040 to the next. That’s why this is NOT the year to procrastinate getting your taxes done until two days before. “It’s important to look at your taxes even earlier if these things happen, because you may need to have some money ready for taxes due,” says Barbara Taibi, partner in the Personal Wealth Advisors Group at EisnerAmper in Iselin, NJ. “For example, you may typically have had enough taxes withheld from your pay to account for other items you owe tax on. Without that income, you may be a little short.” It’s important to keep in mind that even if you file for an extension, any tax payments you owe are still due April 18. The key is to not stress, get started now, and before you know it, the temporary inconvenience that is tax season will also be in the rearview mirror.