On Halloween of last year, my husband found out he was being let go. He had an inkling of it the night before when he learned that someone from corporate headquarters was flying in the next day, unexpectedly. But that didn’t take the sting off. At 10:00 in the morning I got the text, and by 11:00 he and his one box of stuff were in our living room. He was unemployed for five months.

Paul and I have each had our stints of unemployment since graduating college. My first job out of college was with a start-up company and I found out one year later—while packing up my boxes—that my salary had been financed by a USDA grant. Then two years into my second job, our company was bought out by a large, international firm and my position was eliminated entirely. So this isn’t our first go-round in the unemployment department.

As such, I’d like to share with you some of the things we learned from going through the layoff process over the years.

Yes, You Have to Pay Taxes on Unemployment Income

You may not think that unemployment income would need to be taxed; after all, it’s coming from the government, so why wouldn’t they take the taxes out before it got to you? However, you’d be wrong. Unemployment income is taxed just like any other income.

You do have a choice to make: would you like the taxes to be taken out as you receive each payment, or figure out taxes owed when you file in April. A word of advice: I would have the taxes taken out as you receive each payment (unless you just can’t afford to do so). The reason why is because you don’t know if you will have that new, shiny job by tax season, and it’s usually easier to pay a small portion overtime than to pay all at once in the end.

If you decide to have the taxes taken out with each check, then you will need to fill out a W-4V.

Read More: Do You Have to Pay Taxes on Unemployment?

You Get to Keep Your HSA Account, But Not Your HRA Account

If you have a Health Savings Account (HSA), then you get to continue using this money towards health expenses. This is because the money came out of your paycheck to begin with. Also note that if you are unemployed, another reimbursable expense from your HSA is your insurance premium. Unless you are of the age of 65, become permanently and totally disabled, or die, you cannot take a cash payout from your HSA without incurring a penalty for doing so. The penalty (on top of paying income taxes on the cash) is 20%.

If you have a Health Reimbursement Account (HRA), you do not get to keep the benefits (unless this is somehow negotiated into your severance—see below).

Read More: What are the Differences Between FSAs, HSAs, and HRAs?

Your 401(k) Can Stay if You’d Like, But You Might Want to Move it Over

You do not need to rollover your 401(k) to your own broker. Instead, your 401(k) can stay where it is at. In our situation, the fees were higher to manage the money through our previous employer, so we decided to move over the plan and merge it into our broker account (note, you will most likely have to open up another fund in order to rollover the money). We also want to keep everything in the same place for organizational and simplicity sake. If we hadn’t, we would now have three different 401(k)s at three different employers.

Read More: How to Rollover Your 401k to an IRA.

Severance Packages are Negotiable

I have heard from people who have negotiated their severance package successfully. However, I have not attempted to do so for either of my layoffs. The key here is to not sign your severance package (if you receive any, which is not mandatory) the day that they let you go. Take it home, read through the documentation, and check your emotions. Do you feel you deserve more of a severance? Do you want to negotiate health insurance? Is there a reason that your company may negotiate with you?

Read More: Are You Ready to Lose Your Job?

You May Qualify for Specific Tax Deductions for Unemployed People

If you can itemize your taxes, then you may be able to deduct expenses for job searches. Also, if you weren’t eligible for the Earned Income Tax Credit before because your salary was too high, then you may be eligible now since your annual salary has likely gone down (unemployment compensation does not count towards earned income).

Read More: Unemployed Tax Deductions.

Hopefully this will never happen to you, but if it does, you can at least have an idea of what to do in the aftermath.

More Unemployment Resources





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