How Does Losing a Job Affect Taxes?

Unemployment benefits are fully taxable as ordinary income — consider opting in to 10% federal withholding when you start collecting. Severance pay is also taxable as wages. If you take money out of your 401(k) after a job loss, you'll owe income taxes plus a 10% early withdrawal penalty (unless you're 55 or older in the year you leave). You may be able to deduct health insurance premiums if you're self-employed or if your income falls low enough to qualify for the Premium Tax Credit. Job search expenses are no longer deductible at the federal level.