When you’re in a job search, taxes may be one of the last things you’re thinking about.
But at this time, finances can be even more important.
In recent months, there have been changes to the tax deductibility of certain job search expenses, so it’s important to learn what’s new, and what issues may affect your tax liability.
In December 2017, Congress passed the Tax Cuts and Jobs Act, which significantly impacted tax deductions, including those related to the job search.
What You Can Deduct
Previously, jobseekers could deduct things like moving expenses if you were relocating for a job transfer, or the investment of working with a resume writer or a career coach, or the cost of transportation and lodging when traveling as part of your job search.
These types of job search expenses were tax deductible, but only if the expenses exceeded 2 percent of your adjusted gross income, and only if you itemized on your tax return.
With the itemized deduction, if your adjusted gross income was $55,000, you could deduct job search expenses if they exceeded $1,100 (2 percent of $55,000).
This has now changed.
If you are looking for a new job in 2018 and beyond, you will no longer be able to deduct job search expenses on your tax return.
How These Changes Can Impact Your Salary
The 2017 tax law change may also impact your salary negotiations for a new job.
If your new job requires you to drive extensively (using your own vehicle) as part of the position, carefully consider the company’s reimbursement policy.
With the new tax law, employees will no longer be able to deduct unreimbursed automobile expenses.
In 2017 and earlier, these expenses were deductible to the extent they exceeded 2% of adjusted gross income (AGI) IF you itemized on your tax return.
While many deductions have been eliminated for 2018, the standard deduction has significantly increased, from $6,500 to $12,000 for single filers, from $9,550 to $18,000 for the head of household filers, and $13,000 to $24,000 for married taxpayers filing jointly.
The standard deduction reduces your taxable income by that amount without having to itemize deductions.
Most taxpayers choose to take the standard deduction.
While 68.5 percent of taxpayers filed using the standard deduction in 2013 — the most recent year figures are available — that number is expected to rise to almost 90 percent in 2018, according to the nonpartisan Tax Policy Center, because of the larger standard deduction.
In addition, tax rate percentages have changed with the 2017 tax law, and each of the seven tax brackets has decreased by 2-3 percent.
Overall, this is expected to reduce tax liability for most people, although jobseekers who incur significant job search expenses will likely not benefit from the tax change, with the loss of the ability to deduct these job search expenses.
The bottom line: Starting in 2018, job search expenses are no longer tax deductible, even if you itemize on your tax return.
Tax Considerations When You’re Unemployed
Did you know that unemployment compensation is taxable for federal income tax purposes and must be reported as income?
Your state’s unemployment agency will report the amount of benefits you received during the year on Form 1099-G. A copy of this form will also be sent to the IRS.
You must report these benefits on your tax return.
You can choose to have federal income tax withheld from your unemployment compensation so you don’t have a large tax bill when it’s time to file.
However, the amount withheld will be a flat 10 percent, and this may not accurately reflect your actual tax liability.
You can file form W-4V (Voluntary Withholding Request) with your state unemployment benefits office to have taxes withheld from your benefits.
If you receive benefits for more than three months, you may also be required to file quarterly estimated tax payments to the IRS. Consult with your tax advisor for guidance.
States usually exempt unemployment benefits from state tax liability, but you should check with your tax advisor to be sure.
What about your retirement account at your old job?
You also need to handle this issue correctly to avoid tax liability. You may be asked if you want to take your 401(k) with you.
Most financial advisors do recommend taking your 401(k), 402(b), or 457(b) and rolling the account over to an individual IRA.
However, make sure you do what’s called a “direct transfer rollover” — transferring the balance in its entirety — from your previous company directly to an IRA account.
You can contact a mutual fund company or brokerage firm to arrange the transfer. They will provide a rollover application form.
Do not have a check sent to you.
If you do, your previous employer will be required to withhold 20 percent of the total amount as federal income tax withholding.
However, you must deposit 100 percent of the account balance into an IRA account within 60 days, otherwise, you will be charged not only a 10 percent tax penalty for a premature distribution but also your tax rate on the missing money, with certain limited exceptions.
If you’re in a 25 percent tax bracket, you could be penalized 35 percent on the amount missing from the transfer.
If you do have the money on hand to contribute the full 100 percent to your IRA (the 80 percent you received as a check, plus 20 percent of your own money), then you’ll have to apply for the 20 percent withholding refund when you file your taxes.
Depending on your financial situation, that may be a burden you don’t want to incur, especially if you’re unemployed.
If you choose to cash out your retirement account and take the money as a distribution, you’ll pay income tax on the entire amount of the distribution and you’ll incur a 10 percent early withdrawal penalty if you are not 59-1/2 years old.
If your previous employer offered a pension, you may wish to roll over your pension into an IRA, if that’s allowed by the pension administrator.
Pensions are insured by the Pension Benefit Guaranty Corporation (PBGC), but only up to $54,000 and only if you retire at 65.
If you are worried about the financial stability of your previous company and the pension administrator allows you to take a lump sum distribution and roll it into an IRA, you should consider that.
Also, remember that in some cases, a pension dies when you do (for example, if you did not choose survivor’s benefits).
Or, if you did choose survivor’s benefits but your surviving spouse dies before you do (and you’re already receiving benefits), the pension will end when you die.
If you roll your pension into an IRA, however, your account will survive you and can be inherited or donated.
Severance pay may also be taxable.
In addition, you may also owe taxes on any accrued vacation, overtime, and/or sick pay that you received when you left the company.
If you were participating in a profit-sharing plan, you may have to pay taxes on the money you receive, unless you are eligible to roll these funds over into a traditional IRA account.
With a traditional profit-sharing plan, if you’re younger than age 55, you will likely also face a 10 percent penalty on withdrawing your money (although there are some exceptions).
You can shield your profit-sharing money from current taxes by rolling it into a traditional IRA. But again, make sure you’re conducting a direct transfer rollover.
If you work as a freelancer or take on work as an independent contractor while you are unemployed, that income must also be reported to the IRS.
You report this income on Schedule C (Profit or Loss From Business), if you’re an independent contractor or sole proprietor.
If you receive at least $600 in payments from a business, they are required to furnish you with a 1099-MISC form (and will file a copy with the IRS). However, you’re required to report income you receive as cash too.
Also, track your expenses related to your freelance work.
You can deduct expenses that are considered “ordinary and necessary” for conducting your business.
This can include a portion of your rent or mortgage, utilities, and insurance (if working from home), as well as things like office supplies, equipment, and business-related mileage.
If you’re doing odd jobs or earning money from a hobby, you also need to report this as “other income” to the IRS.
And, depending on how much you earn from freelancing or odd jobs, you may also have to make quarterly estimated tax contributions.
Check with your tax advisor to be sure.
Note: This information is not intended to provide financial, legal, or tax advice. Consult with a tax accountant for specific guidance.