I know what you’re thinking—don’t I mean saving for retirement? That’s what everybody talks about, right? Correct. Everybody talks about retirement, including myself, but this time I really mean saving for unemployment.
Why? It’s simple really. Hopefully, unless we die first, we all get to retire once. Some people go back to work, but it’s usually a “retirement job”. But for those of us in the baby boomer generation (post World War 2, 1946 to 1964), according to the US Bureau of Labor Statistics, we can expect to be unemployed an average of 5.2 times over our working lifetimes.
Us Baby Boomers are all headed towards retirement already. So if the Boomers experience an average of 5 bouts of unemployment—what about then Gen-Xers and the groups after them? The Boomer generation experienced some of the greatest economic growth our country has ever seen—it’s quite possible that the younger generations could experience even more bouts of unemployment than we have.
So when I say you need to save for your unemployment, I am very serious.
Here’s what I’m seeing in the tax office. People come to me to do their taxes after they’ve been laid off. They have no savings so they dip into their 401(k)s to pay for groceries and stuff until they find a job. They keep spending at the same level they did while they were still employed, but their 401(k) money often has no withholding and there’s a 10% penalty for taking it out too soon. Tax time rolls around and they are stuck with a huge income tax bill—which they can’t afford to pay—so they take more money out of their 401(k)! It’s a vicious cycle. Sadly, there’s not much I can do to help here, especially after the damage is already done.
The big concern all these people have in common is that they did not have anything in their savings accounts when they lost their jobs. That’s a big problem all across America—people don’t have money in their savings accounts!
Think about this: Suppose your take home pay is $2,000 a month. Let’s say your rent is $1,000 a month. You spend about $500 a month on food and other necessities, and you’ve got about $500 extra that you play with. (Yes, I’m making the numbers easy.) Your bare minimum to survive is $1500 a month. Now, if you have zero dollars in your bank account and you lose your job—well you’re in dire straits in less than 30 days, right? You can’t make your rent payment. But if you have been putting $200 a month away for the past year, you’d have $2400 in the bank. At least your rent would be paid for another month and if you qualified for any unemployment benefits you might have 2 months worth of rent and food. Having some savings set aside buys you an important commodity: time.
Ideally, you want to have enough money to support you for at least six months of joblessness. The fellow in our scenario above would want to have $9,000 put away. ($1500 of monthly minimum expenses times 6 months = $9,000.) At $200 a month, that would take him almost 4 years of saving and I know that’s a little intimidating. But baby steps are how you get there. Everybody has to start someplace. Unless you’ve already been saving, it’s going to take some time to shore up enough money to support yourself for half a year. The big point here is to get started.
Pick a goal. Don’t have one? I’ll give you one. Start with $1,000 in the bank. $1,000 is way better than nothing isn’t it? Gives you a little cushion, right? If you’ve already got $1,000 saved, then your next goal is $5,000. If the $1,000 is still too intimidating then your goal is $100. You don’t even have to have the $100 in a bank—you can hide that under your mattress if you want. But by the time you get to $1,000 you really need to have a bank account.
Don’t get me wrong, it’s still important to save for retirement. But statistically speaking, you’re five times more likely to be unemployed for awhile before you ever reach retirement age. Oh, and what if I’m wrong and you never go jobless even once during your entire working career? Well that’s okay, now you’ve got some extra money saved for your retirement!
Oh and a note from my editor: Also know that you can deduct certain job search expenses as miscellaneous itemized deductions only if these expenses exceed 2% of your income and the job is in the same line of work as your prior one. Such expenses include employment agency placement fees, resume expenses, travel and transportation expenses, and local and long distance phone calls. And another note from me: The IRS keeps telling us that all the time, but in real life I have very few clients who actually get any tax benefit from that deduction. Keep your receipts, just in case, but for most folks, that deduction is pretty worthless.
Filed under: Debt, Debt Resolution, IRS Debts, Unemployment
I write a lot about what to do if you can’t pay the IRS, but this is new stuff just for 2011 taxes. If you’re out of work, or if you’re self-employed and your income is lower than last year, you may be able to apply for an extension of time to pay your 2011 income tax–so you don’t get hit with late payment penalties.
- First, your adjusted gross income (that’s line 38 on form 1040) must be less than $100,000 (or $200,000 if you’re married filing jointly.)
- Second, you need to owe the IRS less than $50,000.
- Losing your job, for one. If you were unemployed for at least 30 consecutive days in 2011 or the first part of 2012, then you can apply for relief.
- Or, if you’re self employed, if your business income is 25% or more less than what it was in 2010, then you also can qualify.
- The relief is only good for your 2011 taxes.
- It only helps with the failure to pay penalty, you’ll still have to pay the interest on your late payment (about a 3% annual interest rate.) You’ll also have to pay any other penalties that you might owe.
- If you don’t pay the amount of tax you owe in full by October 15, 2012–then you’ll still wind up paying the penalty and it will be back-dated to April 15th.
- If you apply for the late payment relief, you must have your tax return or extension filed on time.
The form you need is called: Application for Extension of Time for Payment of Income Tax for 2011 Due to Undue Hardship. That’s a mouthful isn’t it? Fortunately, it’s easier to fill out than it is to say. The form number is called 1127-A. Here’s a link to the IRS website so you can download it yourself:
Besides stuff like your name and address, you only need to know your adjusted gross income and the amount of tax you owe. You can’t e-file the form with your tax return, you have to print it and mail it in. It doesn’t go to your regular tax office–it’s either going to be mailed to Huntsville, New York or Fresno, California. Look at the instructions on page 3 of the form to learn where you should mail your form.
Basically, if you owe taxes and can’t pay, the IRS charges ½ of one percent on the balance due each month that you haven’t paid. So, after 5 months–that’s a 2.5% penalty. So if you owe $5,000 that would cost you an extra $125. That might not seem like that much but why pay the IRS more than you have to? If you think you can come up with the money within 5 months–why not take advantage of the break?
While losing your income is probably the worst thing about losing a job, the second worst thing for most people is losing you health care benefits. If you’re young and reasonably healthy, this might not seem like such a big problem, but for older workers or persons with pre-existing health conditions it can be a nightmare.
COBRA is named for the Consolidated Omnibus Budget Reconciliation Act, the health benefit provision act enacted in 1986. This allows you some time to stay on your employer’s health insurance program for awhile after leaving your job. Generally, you can be covered under COBRA for 18 months. Here’s a link to the Department of Revenue page about COBRA coverage: http://www.dol.gov/ebsa/faqs/faq-consumer-cobra.html.
Under COBRA, you will pay 102% of the real cost of your health insurance. (There’s an extra 2% administrative charge added.) That can be a real shocker if your employer was paying a portion of your insurance while you were working. If you have no income, you might not be able to afford your COBRA payments.
You’re going to have to make a decision, but here’s the important thing you need to know—you’ve got 60 days to make it. This buys you some important thinking time. Don’t sign up for the COBRA immediately unless of course you know you’ve got pre-existing conditions and you won’t be able to get insurance elsewhere. You can hold off signing up for COBRA while you shop around for other insurance (or get another job!). If something happens to you and you need that insurance, you can backdate your enrollment and be covered for the emergency. This is also helpful if you just can’t afford health insurance at all.
Remember, purchasing private health insurance takes time so you want to start right away. If you can’t get coverage elsewhere, you don’t want to miss the 60 day deadline to sign up for the COBRA. Don’t forget to look into state programs as well. Here in St. Louis we’ve got Missouri HealthNet for Kids which provides health insurance to children on a sliding scale basis. Here’s a link to their website: http://www.dss.mo.gov/mhk/ Check out all your options. For many people, COBRA is not the lowest cost option.
For tax purposes, your COBRA or private health insurance is considered to be a deductible medical expense. That said, you’ll have to spend over 7.5% of your income on healthcare in order for it to be deductible. For most people, it won’t give them much of a tax benefit if any.
One more health care issue: If you had an FSA (flexible spending account) at your old job, make sure that you submit all of your health reimbursement forms before the account expires. No sense in leaving money behind.
First and foremost, I’m sorry for your loss. Losing a job is pretty hard to take and you’re allowed to have a mourning period, but you only get about a day because you’ve got work to do. This post is about taxes and timing —you really don’t want to get burned on your taxes in addition to losing your job.
The first issue I want to discuss is severance pay. If you’re getting any severance pay at all, be glad, so many people aren’t. To a lesser extent, in this category I’m including vacation pay and sick leave that’s owed to you as well. Here’s the important part: if you get laid off in the fourth quarter of the year, try to negotiate to have your severance pay paid to you next year.
Here’s why: let’s say you make an annual salary of $40,000 a year. Your company decides to let go of you right before Christmas (it seems to be a popular lay-off time.) On the plus side, they are giving you one year’s salary as a severance package which is pretty sweet. Here’s the problem—if you’re single and making $40,000 a year, your income tax is going to be under $3600. If your company pays you that severance package before January first, your tax bill won’t be $7200 (which would be double) it will be closer to $13800—over $10,000 more! In this scenario, moving your severance package would save you over $6,000—money that could be used for putting food on the table and paying the rent! Of course, if you’re laid off early in the year, take the money right away—you won’t have that tax problem.
Here’s another reason for moving your severance pay ahead—and this includes your owed vacation pay and sick days as well. That money is still considered to be “earned income” and you want earned income on your tax return. Given today’s economy, it’s possible for you to be out of work for an entire year. Unemployment doesn’t give you access to the Earned Income Credit, but wages do and severance pay is wages. You might not be familiar with the Earned Income Credit if you’re used to having a good job with a good income, but when times are tough it can be a blessing so you really want some wages on your next year’s return.
Will my employer agree to pay me later? I don’t know. The one thing I do know is that if you don’t ask, you don’t get. Here’s his side of it—he’s cutting costs by laying-off staff. If he pays you your severance now, that will reduce his taxable income for the year, so that’s his motivation for paying now—less taxes. But if cash is a little short, by paying you in January, it buys him a little breathing room. If he pays your severance in January, then it also postpones when he pays the IRS your payroll taxes as well. If cash flow is a problem for him, he might jump at the opportunity to delay your payment.
One important issue: if you think the company is going belly up—take the money and run! Pay the tax, deal with it. Realistically, belly up companies aren’t doing severance packages, they’re just paying whatever’s required by law. Get your money, cash the check and be done. Having less money to live on is better than having no money to live on.