Job Changes Affecting Taxes

How Job Changes Impact Your Taxes

Few people have the same job for their entire working life. Chances are that you have changed jobs at least once and will again before you retire. Even if you remain in the same profession, you may still move to a new employer at least once. Whether you have been a victim of layoffs or are leaving your current job for a better opportunity elsewhere, remember that changing jobs can significantly affect your taxes, for better or worse.

Finding a New Job

Unless the stars aligned in your favor, chances are your new job did not find you — you probably found it. The IRS allows job seekers to deduct expenses incurred while searching for employment, so long as the new job is in the same profession as your previous one. The deduction is only available, however, to tax payers who itemize their deductions. And even if you do, the IRS only allows you to deduct the portion of your expenses that exceed 2 percent of your adjusted gross income (AGI).

Remember that if you were fired from your job or quit for an eligible reason, you may qualify for unemployment compensation between jobs. But don’t forget that Uncle Sam will still want his share. Be sure to set aside money from your unemployment benefits to avoid sticker shock on April 15th.

Moving for a New Job

If you move to a new job in another city, you will undoubtedly incur relocation expenses. So long as the commute to your new job is at least 50 miles farther from your old home than your previous job was, expenses are fully deductible — whether you itemize or not. The catch? You must remain employed full time for a minimum of 39 weeks of the first 12 months after you move. As an added bonus, however, meeting the IRS distance requirements above may also allow you to avoid at least a portion of the capital gains tax on profits from the sale of your home.

Withholding and Benefits

Moving to a new job means completing a new Form W-9 to declare your allowances and withholding. Be sure to make adjustments to your withholding based on the number of dependents you have. Ideally, your withholding should be as close to your actual tax liability as possible. Why wait to get a tax return next year when you could have the extra cash in your pocket on each payday?

Also, keep in mind that you will need to determine where the money from your previous employer’s 401(k) plan will go. A balance over $5,000 allows you to keep in your old plan if you want, though you may also roll it over to your new employer’s plan or into a private retirement account, such as an IRA. If you convert your old 401(k) balance to a Roth IRA, you will owe taxes on the balance as income, but you will owe zero federal income taxes when you take distributions in retirement.

It is of utmost importance to keep thorough records of your expenses and income throughout the job change process. This includes detailed balance information, receipts, and copies of checks for unemployment, severance pay, or unclaimed vacation time paid to you from your previous job. Tax time will be a breeze, and you’ll avoid any unwanted surprises when you file.