Job Loss and Unemployment - StrataTax

Tax Impact of Job Loss – Starting Your Own Business

Every new phase of life brings many challenges as well as opportunities. Perhaps the most exciting of these opportunities is the chance to start your own business. The guideline below will clarify possible tax implications of starting your own business.

Being an Employee and a Business Owner. For tax purposes, you can be considered both an employee and a business owner at the same time. Your tax return should income all of your income.

Obtaining Information about Starting Your Own Business. The IRS provides free publications for small business owners. StrataTax, a consulting and tax services company, provides business consulting services as well as training and seminars.

Options for Organizing Your Business. There are three options under the federal tax code for the organization of your business: Sole Proprietorship, Partnership or Corporation. A number of factors, such as cost of start-up, exposure to risk or liability, and financing, may influence your decision about which structure is best for you.

Record Keeping Requirements for Sole Proprietors. It is important to keep records of your income and expenses for your business. Good records will help you more easily prepare required tax returns and financial statements. For more information about record keeping, please see the StrataTax article “Good Records Will Increase the Likelihood of Business Success”.

Reporting Business Income as a Sole Proprietor. Business income for a sole proprietor is reported on Form 1040, Schedule C or C-EZ and Schedule SE.

Paying Taxes as a Sole Proprietor. Net self-employment income is subject to income tax and self-employment (Social Security and Medicare) taxes. If you have employees working in your business, you may be responsible for Employment Taxes. As a sole proprietor, you will generally pay estimated taxes on a quarterly basis if you expect to owe taxes of $1,000 or more when you file your return. For more information on Estimated Tax see Publication 505 . Employment taxes are paid using Forms 941, Employer’s Quarterly Federal Tax Return, and Form 940, Employer’s Annual Federal Unemployment Tax Return.

Self-Employment Income and the Earned Income Credit. You may still qualify for earned income credit even if you have net income from a Sole Proprietorship.

Your tax preparer can provide you with more information regarding the impact job loss has on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

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StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section (http://www.stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

TAX ADVICE DISCLAIMER:
Please be advised that in order to ensure StrataTax’s compliance with the rules and standards required by the Internal Revenue Service (IRS), we are informing you that any tax advice contained in this communication, including attachments, is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or promoting, marketing or recommending this transaction or a tax related matter to another party.

Posted by: StrataTax

April 4, 2012

Your Guide to Common Job Related “What If” Scenarios in a Down Economy

Are you currently suffering financial difficulties or preparing for ‘worst case’ scenarios because of the current down economy or job loss? In this uncertain economic environment it is hard to adequately plan for the future. Many of the changes brought about by an uncertain economy may create new tax issues for you. Below are some of the most common job-related “What If” scenarios and their possible tax impact.

Job Loss Scenarios

What If I Lose my Job? You may receive severance pay or unemployment compensation if you experienced a job loss. Both of these forms of compensation are taxable. Also taxable is any income you received for accumulated sick or vacation time. You should ensure that enough taxes are withheld from these payments to avoid a big bill at tax time. If enough taxes are not withheld, you should make estimated tax payments. For more details, please see the StrataTax article “Tax Impact of Job Loss – Guides for Displaced Workers”.

What If I receive Unemployment Compensation? If you received unemployment compensation under the unemployment compensation laws of the United States or of a state, the income is taxable and must be included in your income. You will receive Form 1099-G showing the amount of unemployment compensation you were paid. Form 1099-G will also show any federal income tax you elected to have withheld.

What If my Income Declines? If your income declines, you may be eligible for tax credits or deductions that were previously not available to you because of income limitations.

What If I am Searching for a Job? Certain expenses, such as travel and resume and outplacement agency fees, you incur while looking for a job are tax-deductible. For detailed information, please see the StrataTax article “How Job Seekers Can Use the Tax Law to Their Advantage”.

What If my Employer Goes Out of Business? Even if they go out of business, your employer must provide you with a Form W-2. Contact the IRS if your employer or its representative fails to provide you with a Form W-2. If your 401(k) plan is liquidated by your employer, you have 60 days to roll it over to another qualified retirement plan or IRA.

What If I Close My Own Business? You are still responsible for timely filing all required tax returns even if your business is no longer operating. You must file all required employment tax returns (including Forms 940, 941, 943, or 944) if you had employees while your business was operating.

What If I Withdraw Money from my IRA? Funds withdrawn early from an IRA prior to age 59 ½ are generally subject to a 10 percent additional tax penalty and should be included in gross income. An exception to the 10% penalty is if you use the IRA funds to pay your medical insurance premium after a job loss. See Publication 590, Individual Retirement Accounts. for more exceptions.

What If my 401(k) drops in Value? A 401(k) is a retirement account that receives favorable tax treatment. Due to its favorable tax treatment, you cannot claim a capital gain loss if your 401(k) drops in value. You will only have a loss if you receive a distribution that had previously been taxed.

For more information, please refer to the StrataTax articles “Your Guide to Common Debt-Related ‘What If’ Scenarios in a Down Economy”.

Your tax preparer can provide you with more information regarding the treatment of job related expenses and changes on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

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Categories Job Loss and Unemployment, What If Scenarios
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Posted by: StrataTax

March 24, 2012

Tax Impact of Job Loss – Guides for Displaced Workers

Are you one of the many who lost their job recently? The loss of your job may have affected your personal and financial life. In this article, we look at how your job loss impacts your taxes and provide you with guidelines for your taxes.

Severance Pay and Unemployment Compensation. Severance pay, unemployment compensation and any pay you receive for accumulated sick or vacation time are all taxable and must be included in your income. You will receive Form 1099-G showing the amount of unemployment compensation you were paid. Form 1099-G will also show any federal income tax you elected to have withheld. To avoid a large amount due at tax time, ensure that you have enough income tax withheld or make estimated tax payments.

Withdraws from a Retirement Account or Pension Plan. Generally, withdrawals from your pension plan that are not transferred to a qualified plan (such as an IRA) are taxable. There may be an additional 10 percent additional tax penalty if you are under the age 59 ½.

Searching for a New Job. Certain expenses you incur while looking for a job may qualify as tax deductible expenses. Travel costs for job search and interviews, employment and outplacement agency fees, and resume preparation costs are all examples of deductible expenses. For detailed information, please see our article How Job Seekers Can Use the Tax Law to Their Advantage.

Starting Your Own Business. An option for displaced workers is to start their own business. The IRS provides information and classes for new business owners. StrataTax, aSan Diego consulting and tax services company, also offers training and business consulting.

Relocating for a Job. You may be able to deduct moving costs you incur because of a change in your job location. In order to deduct moving expenses, you must meet certain requirements in regards to distance moved and timing of the move. For more information regarding the deduction of moving expenses, please see the StrataTax articles “Let Uncle Sam Help Pay for Your Move” and “Deduct Your Moving Expenses”.

For more information regarding the tax impact of a job loss, please see the StrataTax article “Your Guide to Common Job Related “What If” Scenarios in a Down Economy”.

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StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

Categories Job Loss and Unemployment
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Posted by: StrataTax

March 13, 2012

Tax Impact of Job Loss – Is the Income You’re Receiving Taxable?

If you lost your job recently, you may be relying on other types of income to pay your bills. Sources of income other than wages include severance pay, vacation payout or cash and gifts from family and friends. Each of these types of income affects your finances and taxes in a unique way. It is important to know if you the income you are receiving is taxable and how to treat it.

Unemployment Compensation. Your state unemployment insurance benefits and your extended benefits are taxable. You have the option of having taxes withheld from your unemployment compensation. You may want to have tax withheld or make estimated tax payments in order to avoid a large tax bill at tax time.

Severance Pay. Severance pay is taxable in the year you receive it and will be included in your Form W-2 you receive from your employer. Your employer will withhold appropriate federal and state taxes from your severance pay. The amount of taxes withheld will also be included on your Form W-2.

Accumulated Leave, Vacation Pay and Sick Pay. Accumulated leave, vacation pay and sick pay are considered taxable income. They will be included as wages on your Form W-2.

Gifts of Cash and Property from Family and Friends. Generally, if you receive a gift you are not liable for any taxes on the gift. You will, however, be responsible for taxes on any income that they gift may produce. In this scenario, income includes interest, dividends or rent payments. The giver of the gift may be responsible for gift taxes if the amount of the gifts exceed a certain amount.

Public Assistance or Food Stamps. Public assistance or food stamps are not considered taxable income.

Final W-2 from Your Employer. Your employer must provide your Form W-2 by January 31^st after the close of the calendar year. If your employer filed bankruptcy or went out of business, they must still file and report your wages and withholding on a Form W-2 at the end of the calendar year.

Filing an Early Tax Return to Receive any Refund Due. Tax returns cannot be filed earlier than January 1^st of the year proceeding the calendar year they are based on. You cannot file a return early to receive any refund due.

Selling Assets Such as Stocks and Bonds. If you sell assets such as stocks, bonds, or investment property, you must report the sale on your income tax return. A gain on the sale may generate an income tax liability.

For more information, please see the StrataTax articles “Your Guide to Common Job Related “What If” Scenarios in a Down Economy” and “Tax Impact of Job Loss – A Guide for Displaced Workers”.

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

Categories Job Loss and Unemployment
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Posted by: StrataTax

March 1, 2012

Special Tax Treatment of Your Unemployment Benefits

Tax Treatment of Unemployment Benefits. A record number of people are currently receiving unemployment benefits. These unemployment benefits receive special treatment when it is time for you to file your income tax return. The tax treatment of unemployment benefits you receive depends on the type of program paying the benefits.

Unemployment Compensation. All unemployment compensation you receive must be included in income. The total unemployment compensation paid to you should be reported to you in box 1 of Form 1099-G. If you receive unemployment compensation you are given the opportunity to have federal income taxes withheld at 10% of your payment. To have taxes withheld, please refer to Form W-4V, Voluntary Withholding Request, http://www.irs.gov/pub/irs-pdf/fw4v.pdf. If you do not have federal income tax withheld, you may be required to make quarterly estimated tax payments.

Types of Unemployment Compensation. Unemployment compensation generally includes any amount received under an unemployment compensation law of the United States or of a state. It includes the following benefits:

Benefits paid by a state or the District of Columbia from the Federal Unemployment Trust Fund
State unemployment insurance benefits
Railroad unemployment compensation benefits
Disability payments from a government program paid as a substitute for unemployment compensation (Amounts received as workers compensation for injuries or illness are not unemployment compensation)
Trade readjustment allowances under the Trade Act of 1974
Unemployment assistance under the Disaster Relief and Emergency Assistance Act

Repayment of Unemployment Compensation. If you repaid unemployment compensation that you received in that same year, the amount you repaid can be deducted from the total amount you received. If you repaid unemployment compensation that you included in income in an earlier year, you can deduct the amount repaid if you itemize deductions. If the amount repaid is more than $3,000, you may generally be able to take a credit against your tax for the year in which you repaid it.

Supplemental Unemployment Benefits. If you receive supplemental unemployment benefits from an employer-financed fund (to which the employees did not contribute), do not include them as unemployment compensation. These benefits are taxable as wages and are subject to withholding for income tax. They may also be subject to social security and Medicare taxes.

Repayment of Benefits. If you repay supplemental unemployment benefits in the same year you receive them, deduct the amount you repay from the total benefits you received. If you repay the benefits in a later year, you must include in income the full amount of the benefits you received in the year you received them and deduct the repayment in the later year as an adjustment to gross income. If the amount you repay in a later year is more than $3,000, you may be able to take a credit against your tax for the later year.

Private Unemployment Fund. Payments you receive from a private (nonunion) fund to which you voluntarily contribute are taxable only if the amounts you receive are more than you total payments in to the fund.

Payments by a Union. Benefits paid to you as an unemployed member of a union from regular union dues are taxable as income. However, if you contribute to a special union fund and your payments to the fund are not deductible, only the amount of the unemployment benefits you receive that are more than your contributions are taxable.

Guaranteed Annual Wage. If you are under a union agreement that guarantees you full pay during the year, any benefits you receive from your employer during periods of unemployment are taxable as wages.

Your tax preparer can provide you with more information regarding the treatment of unemployment benefits on your income tax return. StrataTax, a San Diego consulting and tax services firm, is available year-round to assist you with income tax preparation and tax planning. Call us at (858) 225-7720 to setup your free initial consultation or visit us at www.StrataTax.com for more information.

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

Categories Job Loss and Unemployment
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Posted by: StrataTax

February 5, 2012

Tax Impact of Job Loss – What’s Next for Your Pension / IRA

If you recently lost your job, you may be wondering what’s next for your Pension and/or IRA. This guideline can help you understand the tax impacts of withdrawing money from your retirement plan, making contributions to your IRA, or moving your money to a different retirement plan.

Withdrawals from a Qualified Retirement Plan or IRA. Generally, you may be subject to a 10% penalty if you withdraw funds before you reach eligible age (59 1/2 ) and do not roll it over into another qualified retirement plan or Individual Retirement Account (IRA) within 60 days. The withdraw becomes taxable income in the year in which it was withdrawn.

Moving Money From One Retirement Plan to Another. Moving money from one qualified retirement plan into another qualified retirement plan or IRA is called a “rollover”. Rollover amounts are not taxed as long as you redeposit the amount withdrawn into another qualified retirement plan or traditional IRA within 60 days.

Hardship Exceptions to the Early Distribution Penalty. As discussed above, you may be subject to a 10% penalty for the early withdraw of your funds. However, if you are totally and permanently disabled or if you withdraw the money to pay medical expenses that exceed 7.5% of your adjusted gross income, you may be exempt from the early distribution penalty.

Withdrawal of an IRA Contribution. If you made an IRA contribution during the current tax year, you may be able to withdraw the contribution before the due date of the return without penalty. In addition to the contribution, you must also withdraw any interest or dividend the contribution may have earned. This is a tax free event to you if you meet the following two criteria: (1) you do not take a deduction for the contribution, and (2) you withdraw and include in your income any income or interest the investment made while in the IRA.

The Taxable Portion of a Distribution. If you made contributions to an IRA over a period of years and did not benefit from any deduction due to the income limitations, part of your distribution may be non-taxable. To calculate what part of the distribution is taxable, use the worksheet in Publication 590 (LINK) and complete Part 1 on Form 8606.

Transferring a Pension to an IRA. You can rollover your pension distribution to a financial institution, such as a bank, credit union, or brokerage house. There are some prohibited transactions, which are detailed in Publications 575 and 590 (LINK). Examples of prohibited transactions include borrowing the distribution, receiving unreasonable compensation for managing these funds, buying property for personal use, and using the distribution as security for the loan.

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at www.StrataTax.com/tools/blog. Also, please visit our Tools section (http://stratatax.com/tools) to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

Categories Job Loss and Unemployment
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Posted by: StrataTax

January 25, 2012

How Job Seekers Can Use the Tax Law to Their Advantage

Job seeking doesn’t have to be a frustrating experience. In fact, the experience can provide you with tax benefits. If you are looking for a job, you may be able to deduct some of the expenses on your tax return. The IRS recently released tips regarding the deduction of job seeking costs.

The following expenses may qualify for a deduction only if you are seeking employment in the same trade or business regardless of whether or not the search is successful:

- Fees you pay to employment and outplacement agencies can be deducted. Any amount of money that your employer pays you back in a later year for employment agency fees must be included in your gross income, up to the amount of your tax benefit in the earlier year.

- You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers.

- You may be able to deduct travel expenses to and from an area you travel to in your search for a new job, only if the primary purpose of the trip is to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job.

Below are some limitations on deductible job seeking expenses:

- The amount of job search expenses that you can claim on your tax return is limited to the amount that exceeds 2 percent of your adjusted gross income. You figure your deduction on Schedule A.

- You cannot deduct job search expenses if it is the first time you are looking for a job.

- You cannot deduct job search expenses if there was a substantial period of time since the end of your last job and the time you begin looking for a new job.

______________________________________________________________________________

StrataTax wants to hear from you and encourages comments. You are invited to share your opinions or ask questions related to this topic by visiting us at our Blog at www.StrataTax.com/tools/blog. Also, please visit our Tools section at www.StrataTax.com/tools to explore our library of resources that offers tips and strategies on a wide range of tax and business related topics.

Categories Job Loss and Unemployment, Tax Planning and Strategies
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Posted by: StrataTax

October 15, 2011

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Archive for Job Loss and Unemployment

Tax Impact of Job Loss – Starting Your Own Business

Your Guide to Common Job Related “What If” Scenarios in a Down Economy

Job Loss Scenarios

Tax Impact of Job Loss – Guides for Displaced Workers

Tax Impact of Job Loss – Is the Income You’re Receiving Taxable?

Special Tax Treatment of Your Unemployment Benefits

Tax Impact of Job Loss – What’s Next for Your Pension / IRA

How Job Seekers Can Use the Tax Law to Their Advantage

Job seeking doesn’t have to be a frustrating experience. In fact, the experience can provide you with tax benefits. If you are looking for a job, you may be able to deduct some of the expenses on your tax return. The IRS recently released tips regarding the deduction of job seeking costs.

The following expenses may qualify for a deduction only if you are seeking employment in the same trade or business regardless of whether or not the search is successful:

- Fees you pay to employment and outplacement agencies can be deducted. Any amount of money that your employer pays you back in a later year for employment agency fees must be included in your gross income, up to the amount of your tax benefit in the earlier year.

- You can deduct amounts you spend for preparing and mailing copies of your résumé to prospective employers.

Below are some limitations on deductible job seeking expenses:

- The amount of job search expenses that you can claim on your tax return is limited to the amount that exceeds 2 percent of your adjusted gross income. You figure your deduction on Schedule A.

- You cannot deduct job search expenses if it is the first time you are looking for a job.

- You cannot deduct job search expenses if there was a substantial period of time since the end of your last job and the time you begin looking for a new job.