A new job means a whole lot more than a new desk: From new responsibilities to adjusting to a new company culture, there will be a learning curve as you adapt. You may not have considered the tax issues created when you change jobs. Here are tips to reduce any potential tax problems related to making a job change this year.
It is easy to forget to account for pay received while you’re between jobs. This includes severance and accrued vacation or sick pay from your former employer. It also includes unemployment benefits. All are taxable but may not have had taxes withheld, causing a surprise at tax time.
Associate partner Rich Middleton, CPA offers this advice to minimize the tax time surprise: “You may want to have a flat rate withholding on severance or other accrued pay, commonly 25% for federal and 5% for the state. Unemployment benefits are generally taxable at the federal level only.”
A new job requires you to fill out a new Form W-4, which directs your employer how much to withhold from each paycheck. It may not be best to go with the default withholding schedule, which assumes you have been making the salary of your new job all year. You may need to make special adjustments to avoid having too much or too little taken from your paycheck. This is especially true if there is a significant salary change or you have a period of low-or-no income. Luckily, you can use the withholding calculator the IRS provides on its website. Keep in mind you’ll have to fill out a new W-4 in the next year to rebalance your withholding for a full year of your new salary.
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“The withholding tables and calculators assume that your wages are your only income,” explains associate partner Julie Strohlein, CPA. “If you have other sources of income like dividends and interest, you may want to have more tax withheld from your pay than the calculator indicates.”
While you can leave your 401(k) in your old employer’s plan, you may wish roll it over into your new employer’s 401(k) or into an IRA. The best way is to get your retirement funds transferred directly between investment companies. If you take a direct check, you’ll have to deposit it into the new account within 60 days, or you may be assessed a 10 percent penalty and pay income tax on the withdrawal.
“It is a good idea to consolidate your 401(k) and IRA accounts as you near retirement,” Julie recommends. “Keeping track of multiple accounts can be a headache, and it will complicate matters when you are old enough to be required to take at least a minimum distribution each year.”
Rich suggests considering rolling over to an IRA. “A rollover to an IRA may be preferable as typically an IRA provides more expansive investment options.”
Tally up your job-seeking expenses. If they and other miscellaneous deductible expenses total more than 2 percent of your adjusted gross income for the year, you can deduct them on an itemized return. This includes things like costs for job-search tools, placement agencies and recruiters, and printing, mailing and travel costs. A couple caveats: you can only use these deductions if your expenses were to search for a job in the same industry as your previous job, and you were not reimbursed for them by your new employer.
If you moved to take a new job that is at least 50 miles farther from your previous home than your old job was, you can also deduct your moving expenses. There’s another benefit for movers, too. Typically, you can only use the $250,000 capital-gain exclusion for home sales if you lived in your primary residence for two of the last five years before you sold it. But there is an exception to the rule if you sold your home to take a new job.
“The exclusion for a married couple is $500,000, so many people never pay tax on the gain from the sale of their home,” adds Julie.
Finding a new job can be an exciting experience, and one that can create tax consequences if not handled correctly. Feel free to call for a discussion of your situation.
The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.
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