IRS tax day 2023: Getting laid off can affect your return in surprising ways, H&R Block expert warns

 

By Christopher Zara

 

Dealing with a job loss is stressful enough, but for countless Americans who were laid off in 2022, this coming week could bring them the added headache of being in unfamiliar tax situations when their returns are due.

 

This is especially true for people who work in the tech industry, where many companies began slimming down their ranks in the fourth quarter of last year after overhiring during the early pandemic. By the beginning of this year, the sector had laid off more than 108,000 people.

Karen Orosco, president of global consumer tax and service delivery at H&R Block, says layoffs can impact people’s tax situations in two primary, and probably unexpected, ways. The first: Getting laid off could counterintuitively push you into a higher tax bracket.

“In some of those large layoffs that we saw in the fourth calendar quarter of 2022, severance was paid in a lump sum,” Orosco tells Fast Company. “It’s taxable income. Let’s say someone worked 10 or 11 months at their regular salary, then they received a very large lump-sum severance payment. In some cases, that total amount for calendar ’22 pushed them into an upper tax bracket.”

 

Moreover, the additional income could also push some taxpayers into what Orosco describes as “phase out,” meaning they might no longer qualify for certain tax credits or deductions that they’d relied on under their regular salary.

The second, and probably more common, surprise: For anyone who collects unemployment from their state, Orosco says it’s important to remember that the Internal Revenue Service (IRS) considers that taxable income, and not all states automatically withhold federal taxes from people’s unemployment checks. Some states let you choose whether you want to pay the withholding later, at tax time.

“What we see sometimes is they didn’t elect to have federal taxes withheld from the unemployment,” Orosco says. “So now they’re coming in, it is taxable income, and they had nothing withheld. That’s going to dramatically reduce their refund, or in some cases, push them into a balance-due situation.”

 

The IRS has created a fact sheet of sorts for people with questions about how a job loss might impact their taxes. In addition to severance and unemployment, the agency noted that other payments from your former employer, such as accumulated vacation or sick pay, will also be taxable.

Gifts, however, are usually not taxable up to a certain amount, which tends to change every year. (For 2022, it was $16,000.) Likewise, public assistance benefits like food stamps are not taxable.

For many taxpayers, being caught off guard is what stings the most. If you’re expecting a big refund, but instead get dinged with a tax bill (which you should absolutely, definitely pay), you very easily might find yourself in a precarious situation.

 

“Many people get surprised,” Orosco says. “I think, for us, it’s why we feel so strongly that for tax filers—especially when you have those life changes—it’s so important to make sure that you’re getting the expertise to help you navigate.”

IRS tax day 2023: Getting laid off can affect your return in surprising ways, H and R Block expert warns

Fast Company

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