By Kevin Hagen, Contributing writer
When you lose your job, you've got enough on your mind without worrying about taxes.
Nevertheless, as you look for a new job, you need to be aware of the tax consequences to avoid making costly mistakes and to take advantage of potential tax benefits.
For example, be sure your former employer has your correct mailing address so that you receive your W-2, especially if you move.
If your income for the year drops below the filing limits, you should still file a return to claim a refund for the tax withheld while you were employed and to claim refundable credits.
If you owe taxes and can't pay them, be sure to still file your return to avoid a penalty. You may be able to work out an installment agreement with the IRS.
But that's just the beginning. Here are five more important things that could impact your taxes after losing your job ...
No. 5: Unemployment compensation
When you're out of work, unemployment benefits can be a godsend. They are also considered taxable income by the federal government.
According to the IRS, you must report all unemployment compensation you receive as income.
Generally, you enter unemployment compensation on line 19 of Form 1040, line 13 of Form 1040A or line 3 of Form 1040EZ.
When you apply for unemployment, you can have 10 percent withheld by completing Form W-4V. This way you can avoid owing tax when you file your return. You will receive Form 1099-G after the end of the year.
Otherwise, you can choose to make quarterly estimated tax payments.
Be careful, though. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty.
No. 4: Severance pay
Severance pay or accumulated vacation or sick pay also is taxable.
Tax will be withheld at the same rates as it was from your salary or wages while you were working. These amounts will be included on your W-2.
Remember that severance pay becomes taxable income for that year. If your severance is large relative to your salary, this could bump you into a higher tax bracket. In that case, negotiate to have it paid it out over time rather than in one lump sum.
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.
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.