Have you
changed jobs or are you thinking of
changing jobs? Separation pay, job-hunting
expenses, moving costs, tax withholding,
and more information for your taxes.
Publication 521, Moving Expenses
Separation pay and other compensation
Any severance pay or unemployment
compensation you receive is taxable, as
are payments from your old employer for
any accumulated vacation or sick time,
so be sure that enough taxes are
withheld from these. Also, make sure to
watch for that final W-2 form from your
former employer. The company 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.
Moving costs
If changing jobs requires you to
relocate, your moving costs and the
expense of traveling to your new
location may be deductible. There are,
however, 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. As
for the time test, if you’re an employee
you must work full time for at least 39
weeks (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 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,
assuming you expect to pass the test.
Good news: You can take this write-off
even if you don’t itemize deductions.
Job-hunting expenses
You can take an itemized deduction for
the expenses you incur in looking for a
new job, even if your job search is
unsuccessful, but 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. But there’s a catch: Job-hunting
costs are part of miscellaneous expenses
reported on Schedule A of the 1040. Only
miscellaneous expenses that exceed 2% of
your adjusted gross income are
deductible.
Withholding
Starting a new job gives you a fresh
chance to get your withholding
right—something most employees fail to
do, as evidenced by the fact that about
100 million get fat tax refunds each
year. Take the time to go over the
instructions for the W-4 form you’re
asked to fill out for your new employer.
The number of “allowances” you claim on
that form controls how much will be
withheld from your checks.
Note this: withholding may jump after
your job switch if you have already
earned more than the Social Security
wage base for the year. For 2007, the
6.2% Social Security tax on employees
applies to the first $97,500 of wages.
After you reach that point, your
employer stops withholding the tax. But,
if you move to a different job, that
firm must withhold the tax until it has
paid you $97,500. You don’t really owe
more than $6,045 (6.2% of $97,500), so
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’re
forced to sell your house and move less
than two years after you bought it? 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 ($250,000 for married couples).
Retirement savings
Changing jobs is a dangerous for
retirement savings. Too many employees
take the opportunity to get their hands
on 401(k) money as 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) and, if you’re under age
55 in the year you leave your job,
you’ll also be hit with a 10% tax
penalty. Maybe worse yet,
short-circuiting you retirement savings
could be disastrous for your long-term
financial health.
You have far better options. If you have
more than $5,000 in the account, you can
leave your money with your old employer,
where it will continue to grow in the
tax shelter. You’ll probably 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 has investment options you
like). If you plan a rollover to an IRA
or new employer’s plan, ask your old
boss to ship the money directly to the
new tax shelter. If you have the money
paid to you, with the idea that you’ll
deposit it in the new plan, the law
requires your old plan sponsor to
withhold 20% of your money for the IRS.
It’s tough to rollover money that’s been
confiscated by the IRS. Starting in
2008, you’ll be able to roll 401(k)
money directly into a Roth IRA; for now,
if you want to use the Roth option, you
must transfer your money to a regular
IRA and then convert that account to a
Roth. In either case, you have to pay
tax on the amount shifted to the Roth
IRA, but all withdrawals in retirement
can be 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.
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