How to Prepare For Layoffs: Part 1 | Part 2 | Part 3
Tax Topics that Instantly Change When You’re Laid Off as a W-2 Employee
What I wish I knew about money the day I got laid off
Obviously, if you quickly find a new job, not much has to change, but I know a lot of people, myself included, that can’t find a similar job to what they were laid off from. There are a number of areas, while being a W-2 employee only, that become an afterthought or forgotten. There are obvious cliffs, thresholds, income ranges, and nuance to everything I’m saying. I’m not a CPA nor a tax advisor. But as a W-2 earner, generally speaking, we are taught to, we learn to, and we tend to optimize for income, then optimize tax advantages accounts. There are very few levers that a W-2 employee has at their disposal otherwise. The W-2 earners playbook is, generally speaking: 401k, HSA, Child Care, Health/Dental/Vision/etc insurance premiums, Tax loss harvesting, and backdoor strategies. Everything else is just save as much as possible knowing that as income increases, there is only so much you can do to reduce taxes and Uncle Sam is coming for some piece of it. So the more income you get, the more you can maximize those fixed strategies and the more money you can bring home and put away. When you are laid off, your mindset immediately shifts. While you are obviously looking to increase income, your immediate need is to reduce your taxable income in order to maximize the income you may have or minimize what you owe. And you’re probably screwed the first year you are laid off in a sense.
Your new focus is to reduce AGI because income may not increase.
There are two time periods at play here. The year you are laid off, and the years after. The year you are laid off usually puts you in a pickle because you already have income on the books. Any new income you earn, assuming you do not replace your job with a similar pay, is only adding to your tax burden even though your cashflow is significantly below what it was. This also means that most state and federal programs that can help are out of reach this year because of your income already on the books. As an example, if you made $120k in the first 6 months of 2026 and were laid off in July. You don’t qualify for ACA subsidies which means there is a good chance COBRA is cheaper or better than what you could get directly. You may qualify for medicaid for your kids, so that is helpful, but that is just one example. So, in the year you are laid off, you need some cashflow, hopefully you have some savings, but every penny you make, including capital gains for your savings, is being taxed at your previous tax bracket. The only way you can take advantage of further reducing your tax burden is to start a business. But don’t do this lightly. I will touch more on this in a minute.
HSA
If you had this before you were laid off and you keep your insurance through COBRA, you will still be able to contribute. If you haven’t maxed it out for the year, this is somewhere you can still contribute and retain access to the funds for things you will be spending money on. It also allows your savings to grow tax free. And it reduces your taxable income. You want to try and keep this in year 1+n as well so you can continue to take advantage of it.
ACA/Obamacare
I’m not going to go over all of the thresholds, but there are several things to be aware of here. First, there is an income cliff where the subsidies start to disappear so insurance gets more expensive. When you’ve been laid off from a high w-2 job, you likely already hit those cliffs. Second, if you start a small business, it is possible that you can count those premiums as a business expense (there are caveats here) which further reduces taxable income. Third, if you find a job at some point in the year there are two things to look out for. One is that if they offer insurance, you will lose your subsidy and business expense for that month. Two is that if you are paid enough at the new job, let’s say the last 3 months of the year, then you could pass the cliff for subsidies and have to pay any you received back at tax time.
FAFSA
If you have kids old enough to go to college, and you find yourself, like me, adjusting to a new normal, now nearly 18 months after being laid off. Keep in mind that FAFSA looks at the last tax year. So, schools are seeing that I made salary + severance in 2025 at a rate of about 10x what I’m making right now. This means I’m having to fill out school specific forms and navigate their financial aid processes to provide supplemental information to their financial aid departments. Just something to keep in mind.
Start a business, not a hobby
One of the best ways to further reduce taxable income is to start a business. In fact, my recommendation to any W-2 employee is to do this anyway and build additional income streams. Now there are a number of pitfalls and considerations here. The first and foremost is make sure it’s a legitimate business that is generating income. The IRS will look at a certain number of years back and if you aren’t making any profit, they will retroactively remove any expenses you’ve made. There is a whole world of possibilities for legitimate business expenses that are things you are already paying for. This allows you to pay for them and reduce your taxable income. But there are a lot of rules you have to follow, and this increases your chance of being audited so it is important to do it right. Another income stream you can explore is farming. There is also a form schedule F that is used for Farm Income and expenses. This is separate from Schedule C that is used for businesses. The IRS inspects this heavily and there is a higher burden of proof for it being a hobby, so again, go talk to a lawyer, a CPA, and a tax advisor on this.
Retirement accounts for the self-employed (SEP-IRA, Solo 401k, Roth)
There are several new accounts that you have available to you that you may have not had access to or hit an income cliff for before. Take advantage of these once you have the income to sustain them.
In closing, the week you are laid off go talk to a CPA and/or tax advisor. Don’t wait. You need to start thinking about these things before it happens, but if you haven’t, then they need to be one of the first things you think about.