Changing Jobs is another event that can ripple through your life and can have some serious impact your finances and on your income tax situation.

This Life Event is broken into two components:

Nondeductible Expenses

You cannot deduct job search expenses if:

1. You are looking for a job in a new occupation.
2. You had a substantial break between the time of your last job and your looking for a new one.
3. You are seeking employment for the first time.

Deductible Expenses

If you incurred expenses to look for a new job in your present occupation, you may be able to deduct some of those expenses, even if you have not gotten a new job yet.

Agency Fees

You can deduct employment and out placement agency fees you pay in looking for a new job in your present occupation if:

1. your employer pays you back in a later year for fees that you deducted, you will have to include the amount in your income to the extent that you actually received a tax benefit from the deduction.
2. your employer pays the fee for you and pays the agency directly, you will not have to include the amount as income.

Resume

You can deduct amounts you spend for typing, printing, and mailing copies of a resume to prospective employers looking for an occupation in your present occupation.

Travel

If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area.

You can deduct the travel expenses if the trip is primarily to look for a new job. The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or to look for a new job. Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation, while in the area. If you use the standard mileage rate to figure your car expenses, you will be able to deduct 50 cents per mile.

Social Security Withholding

If you work for more than one employer during the year, too much social security tax may have been withheld from your wages. If too much is withheld, you will be allowed to claim the excess as a credit against your income tax.

You would need to have total wages of more than $97,500 from more than one employer before the excess social security credit will become an issue.

If you do have excess social security paid, it can be claimed as a credit on your tax return. That credit will be claimed on Form 1040 will increase the amount of your refund or reduce the amount of tax that would otherwise be due.

As a final note, when changing jobs, it is a good idea to confirm that your employer has your correct address so that they may send your W-2 without delay. Your employer needs to provide employees with W-2's by February 1; but, if your address is not correct, it can cause you unnecessary difficulty and delay in preparing your tax return.

Additional informational topics relating to the Changing Jobs Life Event:

Retirement Plans

Most employer sponsored retirement plans have a requirement that employees must remove the balance of their retirement plan within a specified time period after leaving the employer. The time limit is established by the plan. You should verify the deadline with your employer prior to leaving.

The money withdrawn from retirement plans can be subject to tax penalties and substantial withholding requirements. The simplest and preferred solution to avoid the penalty and withholding rules is to make a direct "rollover" from your old retirement plan into a new retirement plan with your new employer or into an Individual Retirement Account (IRA).

Most banks, investment companies, and insurance companies offer IRAs and will help you establish your IRA. They will also provide you with information to furnish to your employer which is necessary for your employer to complete the rollover.

A less preferable option is to make an indirect rollover. Under this option, you receive the payment for your retirement plan. The disadvantage to this approach is that your employer will be required to keep a mandatory 20% of the proceeds for taxes. To avoid potential penalty taxes, you would need to restore that 20% from your own funds in order to deposit 100% of the balance. You could then claim a refund for the 20% with your annual tax return.

The full amount of the retirement plan, before the withholding, must be deposited within 60 days to avoid paying a penalty.

The least preferable option is to take the funds directly and not make a rollover contribution. If you are under age 59 1/2 at the time of the distribution, you will generally be subject to a 10% penalty tax on all amounts that are not deposited in a new plan. The 10% penalty is in addition to the normal tax that will be required on the distribution income. The combination of the tax and the penalty tax will consume a large portion to the total funds received.

There are certain exceptions to this penalty. The following six exceptions apply to distributions from any qualified retirement plan:

1. Distributions made to your beneficiary or estate on or after your death.
2. Distributions made because you are totally and permanently disabled.
3. Distributions made as part of a series of substantially equal periodic payments over the life expectancy of the owner or life expectancies of the owner and the beneficiary. If these distributions are from a qualified plan other than an IRA, you must separate from service with this employer before the payments begin for this exception to apply.
4. Distributions that are equal to or less than your deductible medical expenses, that is, the amount of your medical expenses that is more than 7.5% of your adjusted gross income. You do not have to itemize to meet this exception. For more information on medical expenses, refer to Topic 502.
5. Distributions made due to an IRS levy of the plan.
6. Distributions to qualified reservists. Generally, these are distributions to individuals called to active duty after September 11, 2001 and before December 31, 2007.

The following additional exceptions apply only to distributions from a qualified retirement plan other than an IRA:

1. Distributions made to you after you separated from service with your employer, if the separation occurred in or after the year you reached age 55 (After August 17, 2006, does not apply to distributions from qualified governmental plans if you were a public safety employee who separated from service after you reached age 50),
2. Distributions made to an alternate payee under a qualified domestic relations order, and
3. Distributions of dividends from employee stock ownership plans.

The following exceptions apply only to distributions from IRAs:

1. Distributions equal to or less than your qualified higher education expenses,
2. Distributions made to pay for a first–time home purchase, and
3. Distributions made to pay health insurance premiums if you are unemployed.

Refer to Topic 557 for information on the tax on early distributions from IRAs. For more information, refer to Publication 575, Pension and Annuity Income, and Publication 590, Individual Retirement Arrangements (IRAs).

Severance Pay

Amounts you receive as severance pay are taxable. A lump-sum payment for cancellation of your employment contract is income in the tax year you receive it. The severance payment must be reported as gross income.

Severance payments will generally be included in the wages reported to you on Form W-2.

Unemployment

You must include unemployment compensation as income on your tax return.

You should receive a Form 1099-G showing the amount you received.

Strike Benefits

Benefits paid to you by a union as strike or lockout benefits, including cash and the fair market value of other property, are usually included in your income as compensation. You can exclude these benefits from your income only when the facts clearly show that the union intended them as gifts to you.

Unemployment benefit payments from a private fund to which you voluntarily contribute are taxable only if the amounts you receive are more than your total payments into the fund.

Interview Expenses

If an employer asks you to appear for an interview and either pays you an allowance or reimburses you for your transportation and other travel expenses, the amount you receive is generally not taxable.

Include, as income, only the amount you receive that is more than your actual expenses. Also, you cannot deduct any expenses that have been reimbursed.

Moving Expenses

If your new job required you to move, you may be able to deduct some of your expenses for moving to a new home. There are two main criteria for determining if your moving expenses are deductible. The first criterion is that you must move at least 50 miles to be closer to your new job.

The second criteria for deducting your moving expenses is the length of time that you are able to work in the new area. To qualify, you must work in that area for at least 39 weeks during the first 12 months after you arrive in the general area. There are some exceptions to this rule if you are a member of the armed forces, your job at the new location ends because of death or disability, and if you are transferred for your employer's benefit or laid off.

If your move met the tests for deducting moving expenses your deductions could include the cost of moving your household goods and personal effects, including in-transit storage expenses. You can also deduct the cost of traveling, including lodging, to your new home, however, you cannot deduct any expenses for meals.

[ Home ] [ Up ]

Send mail to taxation1@comcast.net with questions or comments about this web site.  Copyright © 2002 Doug's Tax Service Last modified: December 27, 2011