Taxpayers dealing with a layoff or termination frequently overlook the tax consequences of events associated with their unexpected job loss. Yet, properly handling the tax aspects of this life-changing event could prevent a negative financial impact.
Severance or dismissal pay, including an amount paid in lieu of a termination notice, is taxable income regardless of whether the employer is legally bound to make the payment. However, the value of job placement assistance provided by an employer to a terminated or laid-off employee generally may be excluded from income as a working condition fringe benefit.
Qualified moving expense reimbursements are excluded from income. This includes any amount received, directly or indirectly, from an employer as a payment for, or a reimbursement of, expenses that would have been deductible as moving expenses on the taxpayer’s personal tax return if directly paid or incurred by him or her.
Finally, distributions from a qualified retirement plan (less any nondeductible employee contributions) are generally taxed as ordinary income. A 10% penalty tax applies to distributions before age 59½, unless they are part of a series of substantially equal payments or received due to separation from service after age 55, or due to death, disability, or other specific exception.