A Job Loss Is Bad but the Tax Implications Could Make It Worse

decisions that may affect your tax bill for this year and for years to come. Be aware of
these three areas.
1.Unemployment and payments from your former employer
Many people are surprised to find out that federal unemployment compensation is
taxable. (Some states exempt unemployment comp from state tax.) In addition, payments
from a former employer for any accumulated vacation or sick time are taxable. Although
severance pay is also taxable and subject to federal income tax withholding, some
elements of a severance package may get special treatment. For example:

• If you sell stock acquired by way of an incentive stock option (ISO), part or all of
  your gain may be taxed at lower long-term capital gain rates rather than at ordinary
  income tax rates, depending on whether you meet a special dual holding period.
• If you received — or will receive — what’s commonly referred to as a “golden
  parachute payment,” you may be subject to an excise tax equal to 20% of the x rules, along with the excess parachute payment also being subject to
  ordinary income tax.
•  The value of job placement assistance you receive from your former employer
  usually is tax-free. However, the assistance is taxable if you had a choice between
  receiving cash or outplacement help.

2.Health insurance costs
Under the COBRA rules, employers that offer group health coverage generally must
provide continuation coverage to most terminated employees and their families. While the
cost of COBRA coverage is usually expensive, the amount of any premium you pay for
insurance that covers medical care is an eligible medical expense for tax purposes. That
means it’s deductible if you itemize deductions and if your total medical expenses exceed
7.5% of your adjusted gross income.
If your former employer pays some of your medical coverage for a period of time after
termination, you won’t be taxed on the value of the benefit.

3.Retirement plan balance
Employees whose employment is terminated may need tax planning help to determine the
best option for amounts they’ve accumulated in retirement plans sponsored by former
employers, such as a 401(k) plan. In many cases, a direct, tax-free rollover to an IRA is
the best move. You may also choose to leave the account in your previous employer’s
401(k) plan (although the employer may elect to distribute the funds to you). Or, if you get
a new job, you may want to transfer the money in the account with your former employer
to your new employer’s 401(k) plan.