While the government will take the usual bite out of your severance pay, there is some good news that may help that severance stretch a little further.

According to the IRS, certain expenses incurred while looking for a new job may be deductible. Examples of deductible expenses include employment and outplacement agency fees, resume preparation and travel expenses for job search and interviews for work in your current occupation.

woman looking at computer monitor screen

No. 3: Income from self-employment

If you start a business or go to work on your own after losing your job, your earnings are taxable.

You should keep complete records of all your business income and expenses. You may need to make quarterly estimated tax payments, since income tax is not withheld.

If you work from home, you may be able to claim a tax deduction for business use of your home.

Be sure to check out the IRS' Publication 334, Tax Guide for Small Businesses, for more information.
The IRS also offers a number of small-business seminars throughout the nation. You can also order a small-business workshop DVD and other products through the IRS' Small Business and Self-Employed Tax Center website.

401k investment portfolio, financial statement

No. 2: 401(k), IRA withdrawals

You should avoid taking money out of your IRA or 401(k) plan and instead roll it over to another IRA or other retirement account.

Withdrawals are generally taxable and, if you are under age 59 and 1/2, you could be subject to an additional 10 percent penalty.

TurboTax online points out that if you have taken out a 401(k) loan and then lose your job, you must normally repay the loan within 60 days.
If not, the balance of the loan could be considered an early distribution subject to tax and the 10 percent penalty.

If the loan isn't repaid, you should receive a Form 1099-R, which would list the amount of the early withdrawal (Box 1) and how much of that amount is taxable income (Box 2a).

taxes generic paperwork frustration

No. 1: Potential tax benefits

It takes a glass-half-full view of things, but not all of the tax impacts of losing your job are negative.

For instance, you may be able to claim the earned income credit if you have a lower level of income after losing your job.

If you pay someone to take care of your children or other dependents while you look for work, you can claim the tax credit for child and dependent care expenses, which can be up to 35 percent of your expenses.

If you itemize, and take courses to update or improve your skills, or decide to go back to school, there are tax credits for education expenses.