Whether you decide to pursue an exciting new career opportunity or you get laid off, if you leave your job or start a new one, you'll need to think about the tax implications. To better understand the potential tax implications of making a career move, we consulted H&R Block. Have you made a job transition in the past year? Keep reading to learn some of the ways your recent change could affect your taxes.
Starting a New Job
Adjusting Your Form W-4. When you start a new job, you'll need to complete Internal Revenue Service (IRS) Form W-4. Form W-4 is the document you file with your employer that determines how much federal income tax is withheld from your paycheck. The amount is based on your marital status and the number of allowances you claim -- typically, the more allowances you claim, the less tax your employer withholds.
In addition to adjusting your W-4 withholdings when starting a new job, you'll also need to adjust it when other major life changes occur, such as becoming a parent, getting married, and buying a house. This is important because the number of withholdings you claim should be balanced by the credits and deductions that you will claim on your tax returns. Need to change your withholding amount? Ask your employer for a new Form W-4 or download and print the form on the IRS website. Complete the form and submit it to your employer to change your withholdings. To learn more about completing the form, check out H&R Block's Tax Tip 70: Form W-4.
Relocation Expenses. If you've relocated for a job, you may be able to deduct the reasonable moving expenses (but not expenses for meals) you incur within one year from your first day of work. To qualify for the moving expense deduction, you must satisfy two tests. You can visit the IRS website to learn the eligibility requirements and more in IRS Tax Topic 455: Moving Expenses.
Retirement Savings Rollover. When you leave one job to take another, you might choose to rollover your retirement savings. According to the IRS, a rollover is a tax-free distribution of cash or other assets from one retirement plan to another retirement plan. The contribution to the second retirement plan is called a rollover contribution. You don't generally have to pay tax on the amount until later, when you take it in cash. You have 60 days from the date you receive the retirement plan distribution to roll it over (in other words, when you get the check from the first IRA, you have 60 days to deposit the money into the second IRA). Otherwise, you could incur sizeable income taxes and you may be subject to an additional tax on distributions if you are not yet age 59 1/2. Check out IRS Retirement Topic "Rollovers of Retirement Plan Distributions." You can also learn more about rolling over your employer-sponsored retirement-plan account in H&R Block's Tax Tip 31, Retirement Planning.
Unreimbursed Business Expenses. If you incur unreimbursed business expenses as a result of your employment, you may be able to deduct them on your tax return. Learn which business expenses may be deductible and your eligibility for deducting them in H&R Block's Tax Tip 24, Job Deductions Overview.
Losing Your Job
If you lose your job, you may be entitled to receive unemployment compensation. Unemployment compensation benefits are fully taxable. If you receive unemployment compensation, you may be required to make quarterly estimated tax payments. You can learn more about estimated tax payments in H&R Block's Tax Tip 27: Estimated Tax Payments. You can also voluntarily choose to have 10 percent of your unemployment payment withheld to help pay your federal taxes. To have federal taxes withheld from your unemployment compensation, file a Form W-4V: Voluntary Withholding Request and give it to the payer.
Severance Packages. Severance pay, as well as payments for accumulated vacation and sick time, is fully taxable. According to H&R Block, in some cases, lump-sum severance packages may make total annual income too high for taxpayers to claim their usual credits and deductions. As a result, if you are awarded severance as a result of losing your job, you may want to consider making estimated payments and increasing withholding amounts to meet your tax obligations. You can learn more about estimated tax payments in H&R Block's Tax Tip 27: Estimated Tax Payments.
Job-Search Expenses. From interview travel expenses to fees for professional placement services, looking for a new job can be expensive. If you've incurred job-search expenses while searching for a new job in your current occupation, you may be able to deduct them, even if you don't find a new job. To learn the eligibility requirements and which expenses are deductible, read H&R Block's Tax Tip 24, Job Deductions Overview.
Remember that every situation is unique. If you've made a major career move in the recent past and want to learn more about the tax implications, consult the IRS website. You can also learn more on H&R Block's website.
By Debbie DiVito, CPA, Content Manager, Women & Co.
About the Author:
As Women & Co.'s Content Manager, Debbie is responsible for creating original editorial content for Women & Co. In her role, Debbie couples more than seven years' experience supporting clients in the financial services industry with her passion for writing about important financial concepts in a way that is both unintimidating and fun. Debbie is a Certified Public Accountant, has undergraduate degrees in Finance, Multinational Business Operations, and Spanish from The Florida State University, and holds a Masters degree in Accounting from The University of Virginia.