Federal Income Tax when You Are Unemployed

When you lose your job and find yourself unemployed, income taxes may not be the most important thing on your mind. But during this difficult time, it is important to be aware of the different income tax aspects of your present situation, and the tax consequences of different courses of action you can take, in addition to knowing about potential tax benefits available to you.

The Internal Revenue Service (IRS) has a number of publications that explain different aspects of the income tax law and how they are applied. These publications are referenced as they apply in the following discussion, and can be found on the IRS website at www.irs.gov. For example, IRS Publication 17, Your Federal Income Tax, is a comprehensive guide to individual income tax topics. And there are specific publications that relate to each topic individually.

Severance Pay and Vacation or Sick Pay

Any severance pay or accumulated vacation or sick pay you receive when you leave your job are taxable. Income tax should have been withheld from these payments based on the same rates that were used for withholding tax from your salary or wages while you were working. These amounts will be included in the Form W-2, Wage and Tax Statement, that you should receive by January 31st of the following year. Severance pay and vacation or sick pay are included with your salary and wages and are reported on the same line of your federal income tax return.

You should notify your former employer if you move after you have left your job so that this form can be sent to the correct address. If you lost your job because your employer went out of business, you should still receive a W-2 from your employer or its representative. If you cannot obtain one, the IRS can help you based on the records they have for you.

Unemployment Compensation