A Tax Fact from The Tax Institute at H&R Block

Changing jobs is a good thing
However, as far as your taxes are concerned, why and how you're changing jobs has a lot to do with how the change affects your taxes. Are you changing careers, changing locations, moving from the private sector to a government job, changing from working for a corporation to self-employment, or were you fired or laid off? All of these scenarios create particular tax situations of which you should be aware before taking your next step.

Finding your new gig
First of all, you can deduct job search expenses such as the cost of resumes, including production, printing and mailing costs, long distance calls and even travel to your interviews. However, you can't write off anything for which you were reimbursed. One more caveat: there are many restrictions on write-offs in this area (for example, if you are changing to a different career or simply advancing yourself within your existing career).

Down but not out
And what about changing jobs because you've been laid off? Being jobless doesn't mean you're tax-free. If you're receiving unemployment benefits, these benefits are taxable income under current federal tax law. Therefore you owe federal income tax on them. You can minimize your balance due by filing Form W-4V with the payer to specify the amount of federal income tax that you want withheld from your unemployment benefits.

Movin' on up
Maybe you're changing locations to accept your new position. In years past, only those who itemized got to deduct their job-related moving expenses. Now, everyone who qualifies can do so. Making this write-off available to those who use the standard deduction is especially important to those who rent rather than own their homes and thus generally don’t itemize.

To claim the deduction, the move must be in connection with taking a job at a new location and the new job must be at least 50 miles farther from your old home than your old job was. You must also work full time 39 weeks during the first 12 months of arriving at the new location, and the expenses must be incurred within 1 year of taking the job at the new location.

Transitioning from employment to self-employment
If you're moving from the corporate life to self-employment, you'll now be responsible for your own tax payments and deposits to the federal government. Income received as a consultant is self-employment income and the net profits are subject to self-employment tax as well as income tax. Consulting income and expenses are reported on Schedule C unless your business is incorporated or you are in partnership with one or more individuals.

When planning for next year, you may need to pay quarterly estimated taxes. And beware, late estimates can result in an underpayment penalty even if you pay in enough during the year to cover your tax liability.

Your rainy day or sunny retirement
One of the most important questions facing someone changing jobs is what to do with your retirement account accumulated while working at your former job. Making the wrong move could cost thousands in taxes and mean lower returns on your investment.

The rule of thumb among tax planners: it's best not to touch the money. Early withdrawal of funds from a retirement account makes the funds subject to tax and often subject to a 10% penalty. If you decide to have your distribution paid to you, the plan administrator will withhold 20 percent of your total distribution for federal income taxes - so on a $100,000 withdrawal, you're automatically down to $80,000. If you're not yet 59 1/2 years old, there's also a 10 percent penalty for early withdrawal, so now you have $70,000. Then come April 15, you'll pay the difference between your tax bracket and the 20 percent already taken out, because the distributions are taxed as ordinary income. For a wage-earner in the 25 percent bracket, another 5 percent or $5,000 comes out.

Then, depending on where you live, you could still owe state and local taxes as well – and even an early withdrawal penalty at the state level.

After all that, your $100,000 IRA distribution has been whittled down to $65,000, or even less.

Note: You can roll the distribution into an IRA within 60 days, but unless you come up with the $20,000 that was withheld and roll that over, too, the $20,000 will be taxed and subject to penalty.

Instead of taking an early distribution, find out if your new employer offers a retirement plan. If so, it's easy to roll your account into the new plan. Your former employer's plan administrator will provide you with the forms and paperwork to make the change. The best method is to have the money sent directly from your old plan to the new one. With the direct transfer, you won't have to deal with the money directly - and your savings continue to grow until you retire.

If you've decided to work for yourself or prefer to manage your money yourself, consider a direct rollover to an IRA from your employer’s plan. Doing so moves the money to an IRA but avoids the 20% withholding.

Changing jobs can be stressful - but hopefully, when it's all said and done, the move is the right one for you in the long run.

This Tax Fact is brought to you by The Tax Institute at H&R Block.
To view other helpful tax information or listen to our Tax Fact podcasts, visit www.digits.hrblock.com

As always . . . everyone’s tax situation is different, so be sure to consult a tax professional or financial advisor before making important financial decisions.

This Tax Fact is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice, nor is it intended to be used to avoid IRS penalties.