Tax Tips for Navigating Unemployment and Layoffs in 2025 – Forbes Advisor


Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

In this economy, losing a job is especially rough, and if you’re one of the many people laid off this year or collecting unemployment, you’ve probably got a lot on your plate already.

But there’s one more thing to add to your plate: Taxes. Taxes don’t go away just because your paycheck does. If you’re receiving unemployment checks or have received severance pay, it’s important to understand how those payments affect your tax return.

Understanding Taxable Income: Unemployment and Severance

The federal government still considers unemployment benefits to be taxable income. When tax season rolls around, your state will send you a 1099-G form showing how much you received and whether it withheld any taxes. 

If your state didn’t withhold anything, don’t worry—you can still fix that. Asking your state to take out 10% from future payments is a smart move that can save you from a surprise bill when it’s time to file.

Now, about severance: The government taxes it just like your usual paycheck. Even if you received it as a lump sum, it still counts as income for the year you got it. Your old employer will include it on your W-2, and yes, it’s subject to income tax, Social Security and Medicare. Depending on the amount, it might even push you into a higher tax bracket temporarily, but only for that year.

If you earned less this year because of a layoff, there’s a silver lining—you might qualify for a refund when you file your taxes. Filing early can get that money to you faster. Just don’t forget to include all compensation you received—unemployment, severance, unused PTO and any last paychecks—since all of it counts as income.

Credits and Deductions to Watch

A lower income can also open the door to valuable tax credits and deductions. You might now qualify for the Earned Income Tax Credit, the Child Tax Credit or the Child and Dependent Care Credit. 

Depending on your state, you may also qualify for deductions for job-search expenses or retraining programs, even though those no longer apply at the federal level. With various credits and deductions, it is crucial to research your eligibility to maximize your earnings thoroughly.

Additionally, if no one withheld taxes from your unemployment or severance checks, or if you’re earning income from freelance or gig work while job hunting, it’s a smart idea to pay estimated taxes every few months. You can do so with a Form 1040-ES. It helps you avoid an unexpected tax bill and prevents penalties when it’s time to file your taxes.

Tool for Filing Your Taxes

If you’ve recently left a job, filing your taxes might feel like one more thing to worry about—but the best tax software can make the process easier. We recommend platforms like TurboTax, TaxSlayer and H&R Block, which guide you through the process step by step.

You’ll enter your details—like W-2s, 1099s or any unemployment income—and the software handles the rest. It flags possible deductions and does the math for you. With just a few clicks and some typing, you can file your taxes confidently.

Final Takeaways

  1. Try to file early, as you may qualify for refunds. Also, it’s important to file on time.
  2. Verify withholding on unemployment and severance to reduce tax surprises.
  3. Explore new deductions, primarily if you work tipped or overtime roles.
  4. Claim credits and deductions as income changes.
  5. Constantly monitor IRS updates.

Compare the best tax software of 2025

Bottom Line

A layoff or job loss can impact more than just your paycheck and mental health, as it affects your tax status, too. You can reduce uncertainty and maximize your refund by staying informed, updating withholding and taking advantage of deductions and credits.

Leave a Reply

Your email address will not be published. Required fields are marked *