There’s been a lot of talk about a looming recession, and you may be concerned about what that means for you. During a recession, you’re at greater risk of losing your job and the benefits that come with it – your income, health insurance and retirement savings. Some companies have already started laying off workers and rescinding new job offers. If your employment status changes, your taxes will likely be impacted. Having a lower taxable income may help you qualify for tax credits and deductions you were previously unable to claim. Here’s how your taxes will change if you’re laid off due to the recession.
What is a recession?
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months”. Some indicators to watch out for are high unemployment rates, lower consumer spending, rising inflation, manufacturing slowdowns and a decline in real gross domestic product (GDP).
Unemployment benefits count as taxable income
Losing your job is stressful, especially when you don’t see it coming because chances are you don’t have enough savings to cover 3 to 6 months of living expenses. The good news is that if you’re laid off or lose your job due to no fault of your own, you may be able to collect unemployment compensation. This can provide temporary relief while you look for a new job, but it counts as taxable income at tax time. In January, you’ll receive a 1099-G stating the amount of money you received, and it must be reported on your tax return. To avoid owing money or receiving a smaller refund, request to have taxes withheld from your benefits or make estimated tax payments throughout the year.
Note: If you receive a lump sum severance or get paid for your unused vacation days that income is also taxable. However, welfare and food stamps are not.
Earning less money can help you qualify for more tax credits
Having less taxable income means you may now qualify for the Earned Income Tax Credit (EITC) which is a special credit for workers with modest incomes. To qualify for tax year 2022, your AGI cannot exceed:
|Number of children||Single, Head of Household, or Widowed||Married Filing Jointly|
|3 or more||$53,057||$59,187|
Your investment income must also be $10,300 or less.
Your EITC amount will be based on your income and the number of children you have. The maximum credit amounts are:
- No children – $560
- 1 child – $3,733
- 2 children – $6,164
- 3 or more children – $6,935
When you use ezTaxReturn, our software automatically calculates the EITC for you if you qualify. Eligible taxpayers may also be able to claim Child Tax Credit and Child and Dependent Care Credit. Don’t worry, if there’s a tax credit or deduction you rightfully deserve, ezTaxReturn will help you claim it, so you get your biggest possible refund.
Decide what you’ll do with the money in your 401K
According to Fidelity, the average worker contributes 14% of their paycheck to a 401k. When you leave your job, you have several options for what to do with the money. You can leave it in the account, roll it over to an IRA, transfer the money from your old 401K to your new employer’s 401k (if you already have another job lined up) or you can take the money and run. The last option isn’t the best choice because not only will you set your retirement savings back, but you may also face a 10% early withdrawal penalty. You have 60 days to roll the money over to a new account. Keep in mind, you will be taxed if you move the money from a 401K to a Roth IRA.
The premium tax credit can help you afford health insurance
Often, losing your job also means losing health insurance. But you can qualify for a special enrollment period for a Marketplace health insurance plan and receive coverage for the rest of the year. You may even be eligible for a premium tax credit to help cover your insurance premiums. Since the tax credit is based on your income and family size, it’s important that you update them as soon as you find a new job so they can make necessary adjustments. If you receive more assistance than you’re allowed, you’ll need to repay the excess when you file your tax return. If you use less, you’ll get the difference as a refund.
You can no longer claim a deduction for job hunting expenses
Unfortunately, the Tax Cuts and Jobs Act eliminated the job hunting expenses tax deduction for most taxpayers, so you’ll no longer be able to claim them when you file.
Quick tips to get financially prepared for a recession
Although there’s been some debate about when a recession will occur, the fact of the matter is you need to get financially prepared now. Having a plan in place will make it easier to survive an economic downturn. Here are some things you can do to get ready.
- Review your budget and look for ways to reduce your expenses
- Bulk up your emergency fund
- Pay down your high-interest debt
- Continue contributing to your retirement accounts
- Take advantage of free online courses to boost the skills on your resume
- Pick up a side gig so you have an extra stream of income