How to get your credit and budget stable when you’re unemployed.
By Kevin Fogarty
Unless you’ve filed for an extension, chances are your 2008 taxes are behind you. But what sort of tax planning should you be doing for 2009 if you’re currently between jobs?
Sure, getting laid off means having to deal with a lot of things you'd rather not. But figuring out what taxes for which you'll be obligated — especially on benefits you get only because you've been laid off —seems like adding insult to injury.
Yes, you may be obligated to pay taxes on unemployment insurance payments. At your local unemployment office you can fill out a Voluntary Withholding Request (W-4V) and ask that 10 percent be withheld for federal taxes; it won't cover the whole bill but will make that part easier.
You don't have to pay taxes on COBRA health-insurance benefits or many other unemployment insurance benefits, such as paid outplacement or job counseling.
But this year's taxes are not the issue, according to Brad Rosenberg, president of Brad S. Rosenberg CPA of Nassau County, Long Island.
The issue the recently laid off have to deal with first is how to pay their living expenses and how to get back on a stable footing, whether that means full-time employment, consulting or freelance work, or some combination of the two.
Put off thinking about taxes you'll have to pay on this year's diminished income, Rosenberg said. Instead, focus on minimizing spending to create a bubble of security that can carry you through your job search.
"The first thing is you need to find out is if there's a severance package available and if it is, what delivery method is available to get it over a longer period of time rather than in one lump sum," said Rosenberg, a tax expert to whom TheLadders’ own HR department refers questions.
If you are given the option of receiving severance in one lump sum or spread over several months, you should consider the tax implications of your decision, according to Alan Federman, TheLadders’ financial controller. For example, if you have fulfilled your FICA obligations for the current calendar year, it may be advantageous to take as much of the severance as you can in that year. “Alternatively, you may have some tax events in the future (e.g., an expected real-estate sale or new family “additions”) that make spreading or deferring the payments a better alternative,” Federman said.
Spreading out your severance payments "does have an impact on cash flow,” Rosenberg said. “And human nature is such that the psychological boost of knowing you're still getting a 'paycheck' every week or month means that, emotionally, you're still getting income. That eases the blow of being unemployed."
Money has a tremendous impact on morale and motivation, especially for job hunters in a lean economy, Rosenberg said.
That may mean bending some other normal practices for the short term.
Easing the crunch
Rather than paying off credit-card debt quickly to minimize long-term interest payments, unemployed job seekers should consider paying the minimum amount each month. "Or even nothing," Rosenberg said. "Contact the credit-card company. Some of them have programs that will give people a pass for a few payments, and there is legislation that's part of the recovery package that may put pressure on credit-card companies to do that as well. They know that, so a lot of them are willing to wait. And there are a lot of nonprofits that can work with you to help work out payment plans as well."
More importantly, residence costs have to be decided differently. Renters are in a worse position than owners because it's easier in most states to evict people for nonpayment of rent than it is to foreclose on a mortgage and resell the property.
"That's one of the decisions you have to make to nail down a budget with the absolute minimum of your living expenses — costs for school, food, auto, whatever it costs you per month,” Rosenberg said. “Then you add up your savings, severance, unemployment … to figure out how to make your nut."
Only after you've nailed down immediate cash-flow questions and begun your job-search or recovery plan should you worry about taxes you'll have to pay during this year, he said.
"Job loss is very disruptive. It throws a big wrench into plans people have," according to Roy Cohen, who holds the title master career coach at the Five O'Clock Club, a private outplacement and career-counseling club based in Manhattan.
Although neither he nor the Five O'Clock Club can offer financial advice or evaluations, Cohen said unresolved financial questions can keep clients from focusing all their energy on networking and strategy, or even deciding how long they can afford to look for a job.
"If I know the client can manage for a year, we can take a more thoughtful, strategic course of action," Cohen said. "If they have no cushion, I know we have to be very aggressive — doing triage, making sure the resume is terrific, getting them out there talking to recruiters and looking for consulting or permanent opportunities. It has to be part of how you present yourself."
Part of that presentation may be admittedly temporary. There are a lot of former executives doing consulting work, sometimes below their former pay or seniority grade, just to keep money coming in, Cohen said.
When your financial situation stabilizes a bit — not meaning it's back to normal, but that you have done what you can to minimize your payments and focus on your job search — that's the time to think about improving your tax situation for next year.
If you do any consulting or freelance work at all, for example, you can write off most expenses directly related to getting or doing that work, he said. That may include cell-phone use; Internet service; and networking expenses, such as professional association memberships.
But remember: The IRS requires that you pay Social Security and Medicare taxes on any of that income. For the self-employed, that means paying both the employer's and the employee's share of Social Security. IRS guidelines say consultants should pay quarterly, at a tax rate based on estimating your income for the whole year based on what you've made during the previous three months.
More-detailed instructions are available at Social Security Online’s electronic fact sheet. There are plenty of online guides and tools, and nonprofit credit-counseling agencies can help make decisions, but the IRS is still the best source for information on tax requirements and often writes those descriptions in language non-specialists can understand.
Reliable investment and credit advice is sometimes hard to come by, especially on the cheap. Rosenberg recommended calling your state CPA society and asking for a referral to a nonprofit credit-counseling agency that can offer more-detailed tax and credit advice. It's usually free, he said, and often quite good.
And you'll want to reconfigure some of your investments as well. Rather than leave money in the stock market, you might want to move it into certificates of deposit, treasury bills or other stable investments, Rosenberg said.
"When your living expenses are covered, you can go back to being a little more daring in your investment approach," Rosenberg said. "That all changes when there's no more income coming in."
Kevin Fogarty is a general assignment reporter for TheLadders.