Changing Jobs

Updated for Tax Year 2019


OVERVIEW

Have you moved on from your old job, or are you in the middle of a job change? Even if you're just thinking about it, here's some tax information you'll need to keep in mind.


Career changes affect taxes

Whether you get an exciting new career opportunity or fall victim to corporate downsizing, you're likely to switch jobs at some point—perhaps often—in your career. However, leaving a job and starting a new one can create a number of implications for your tax bill and your benefits.

Separation pay and other compensation

Remember that Uncle Sam will want his cut of any severance pay or unemployment compensation you receive when you leave a job, so make sure enough taxes are withheld from these. The same is true for any accumulated vacation or sick time.

Also, be on the lookout for your final W-2 form. Your former employer isn't required to send it to you right away, but must provide it by January 31 of the year after you leave the company—the same deadline you would have if they still employed you.

Withholding tax

It’s a fact: Most employees have too much taken out of their paychecks. That's why about 100 million folks get fat tax refunds each year. Why give the IRS more than you need to? A new job offers you a fresh start to get your withholding in order.

Take time to go over the instructions for the W-4 form you fill out for your new employer. The number of "allowances" you claim on that form determines how much will be withheld from your checks.

Note: Withholding may jump after your job switch if you have already earned more than the Social Security wage base for the year. When you reach that point, your employer stops withholding the tax. But if you move to a different job, that company must withhold the tax on the amount it pays you up to the wage base. You don't really owe more, but the amount withheld will increase if you have more than one job and earn over the wage base for the year. On the bright side, any excess Social Security tax withheld will be refunded when you file your tax return for the year.

Selling your home

Moving to a new job may entail selling your primary residence, which can have capital-gains tax implications. Normally, the law allows you to avoid capital-gains tax on the first $250,000 of gain on the sale of your home ($500,000 for married couples) if you have lived there at least two years out of the last five.

What happens if you have to sell your house and move within that two-year time period to take a new job? If the sale is the result of a job change, and you pass the 50-mile distance test described above, IRS rules allow you to take a partial exclusion based on the amount of time that you used the house as a primary residence.

If you owned and lived in the house for just one year, for example, you'd get half the exclusion available to those who meet the two-year test. That doesn’t mean half the profit is tax-free; it means all the profit up to $125,000 would be tax-free (up to $250,000 for married couples).

Retirement savings

Changing jobs can create havoc with retirement savings. Too many employees take advantage of this opportunity to get their hands on 401(k) money as if it were a license to do so.

At any age, cashing in the 401(k) means paying tax on every dime you withdraw, unless you have made after-tax contributions. If you're under age 55 in the year you leave your job, you'll also be hit with a 10 percent tax penalty. Keep in mind that short-circuiting your retirement savings could be disastrous for your long-term financial health.

If you have more than $5,000 in the account, you can leave your money with your former employer, where it will continue to grow. However, you may be better off transferring your 401(k) balance to an IRA, where you would have almost unlimited investment options, or your new employer's 401(k) if it accepts transfers and offers favorable investment options.

If you plan a rollover to an IRA or new employer's plan, ask your former boss to send the money directly to the new account. If you request that the money be paid to you, with the intention that you'll personally deposit it into the new plan, the law requires your former plan sponsor to withhold 20 percent of your money for the IRS.

You can also roll over 401(k) money directly into a Roth IRA. You will have to pay tax on the amount you shift to the Roth IRA. However, withdrawals at retirement are generally tax-free.

If part of your 401(k) is invested in your company's stock, be sure to check out the special rules for "net unrealized appreciation," a mouthful of a tax-term that could save you money. Count on TurboTax to handle all your life changes with easy, customized solutions for the biggest refund results.

Job-hunting expenses

For tax years prior to 2018, job hunting expenses are deductible as a miscellaneous expense but only if you itemized deductions on Schedule A. Only miscellaneous expenses that exceed 2 percent of your adjusted gross income are deductible. Beginning in 2018, these miscellaneous expenses are no longer deductible.

You can take itemized deductions for the expenses you incur when looking for a new job, even if your job search is unsuccessful. A key point is that the job you're seeking must be in the same line of work. Eligible expenses include the cost to print and mail your resume, fees paid to an employment or outplacement agency, and travel costs associated with the job search.

Moving expenses

Like job-hunting expenses, moving expenses are only deductible for tax years prior to 2018. However, you don't have to itemize your deductions to get this deduction and they are not subject to the same 2 percent of adjusted gross income limit like job-hunting expenses. Beginning in 2018, moving expenses are only deductible for certain qualifying military-related moves for military service members.

Prior to 2018, if changing jobs requires you to relocate, your moving costs and the expense of traveling to your new location may be deductible, but there are distance and time tests you must meet. Your move passes the distance test if the main location of your new position is at least 50 miles farther from your former home than the main location of your old job. Note that the distance from your home to the new job isn't what matters; it's that the commute would have to be at least 50 miles farther if you didn't relocate.

Moving expenses may be deductible if they satisfy time-test requirements. If you're an employee, you must work full-time for at least 39 weeks (although not necessarily for the same employer) during the first 12 months after you move. If you are self-employed, you must work for at least 39 weeks during the first 12 months, and for a total of at least 78 weeks during the first 24 months after you arrive in the general area of your new job location.

You can claim the deduction for the year of the move even if you haven't yet passed the time test when it's time to file your return.

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