Career changes, whether you’re starting a new one or facing a job loss, will impact your taxes. After all, the bulk of your tax liability very likely comes from earned income, and when that increases (or decreases), your taxes will be significantly affected.
When you are starting your career or changing jobs, there are a number of documents and expenses that need your attention. First, you’ll need to complete or update your W-4 form, so your employer withholds the correct amount of federal income tax. However, before you starting filling out that form, you’ll need to know what your personal allowances and deductions may be; otherwise, you may have too much or too little withheld from each paycheck.
To start, you’ll claim yourself (provided no one else claims you as a dependent for tax purposes). You can also claim your spouse and the number of dependents you will claim on your tax return. Be careful in claiming your spouse on your W-4 if he or she is also employed full time, or you may end up having too little tax withheld and a tax bill due in April. Additionally, if you typically itemize deductions on your return or claim certain credits or income adjustments, you should take these into account when completing your W-4 form. Check out the IRS Withholding Calculator to help make the process a little easier.
If you relocate for your new career, you may be able to deduct moving expenses. In order to do so, you must meet three requirements: timing of your move, the distance test, and the time test. For more details on these requirements and whether or not you are eligible for this deduction, please see Deducting Moving Expenses.
There are also some job-related deductions that you may be able to claim, and these are not limited to those who are self-employed or own their own businesses. You can deduct unreimbursed employee expenses that are required for you to complete your job function as long as the IRS considers them to be “ordinary and necessary.” Some examples include: legal fees; licenses; occupational taxes; dues to professional groups, unions, or trade groups; required education; work clothes or uniforms; subscriptions; and medical exams required by your employer. Mileage is also deductible, but generally excludes your commute to and from work. If you work multiple jobs or are required to drive for your position (e.g. sales rep driving to a client’s office), this mileage can be deducted.
Keep in mind that these items are only deductible if you do not receive reimbursement from your employer, and you must itemize your deductions in order to claim these. Additionally, you can only claim the amount of expenses that exceed two percent of your adjusted gross income.
Another deduction that can have a very big impact on your tax situation is the cost of health insurance premiums. If you pay a portion (or all) of the health insurance that may be offered by your employer, you can deduct this expense. As with unreimbursed job-related expenses, you will need to itemize deductions and may only claim medical expenses that exceed 10 percent of your adjusted gross income. There are other medical and dental expenses in addition to health insurance premiums that can also be deducted.
Job Loss Tax Implications
If you lose your job, there are also impacts to your tax liability. The first thing to keep in mind is that unemployment compensation may very likely be taxable as income. (Learn more about how the IRS defines unemployment compensation.) As taxable income, you will need to include any unemployment payments as gross income on your tax return. In the same way you would have an employer withhold taxes for you, you can also have taxes withheld on unemployment compensation. This is handled on Form W-4V, Voluntary Withholding Request. This is often a more convenient approach than making quarterly estimated tax payments. Withholding percentages are fixed at 7, 10, 15, or 25 percent.
You may also elect to tap some of the money in your traditional retirement account in the case of job loss. There is a 10 percent penalty for early withdrawal (before age 59½), but there are some exceptions. If you use an early distribution to cover the cost of medical insurance premiums for yourself, your spouse, or your dependents, you can quality for an exception from the penalty. There are other requirements tied to this exception (e.g. you must have received unemployment compensation for at least 12 weeks).
Regardless of any exception to the early withdrawal penalty, distributions from a traditional IRA or 401(K) are taxed as regular income. As with unemployment compensation, you should choose to have at least some of the taxes due withheld at the time of distribution.
There are also job-seeking expenses that you will be able to deduct when you file your tax return. To qualify, your job search must be in your current occupation, and you cannot deduct job-search expenses if there is a substantial time lapse between the end of your last job and your current search. These expenses include things like employment and outplacement agency fees; resume preparation, printing, and mailing; and travel expenses for job search or interview.
As with unreimbursed job expenses, your job-search expenses can only be deducted when you itemize and are subject to the same thresholds.
When you face a life transition that involves your career, be prepared for paperwork and the need to keep receipts and otherwise document your expenses in order to avoid overpaying taxes. It can be complicated, so feel free to contact us, and we can help you throughout the entire process.
The IRS has announced plans for processing returns next year, and the result could mean a delay in refunds. This delay affects those taxpayers who claim the Earned Income Tax Credit (EITC) and/or the Additional Child Tax Credit (ACTC). Early filers who claim either of these credits will not see a refund (if one is due) until after Feb. 15, 2017.
Congress enacted the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) on Dec. 18, 2015. This law mandates that “no credit or refund of overpayment for a taxable year shall be made to a taxpayer before Feb. 15 if the taxpayer claimed the Earned Income Tax Credit or Additional Child Tax Credit on the return,” according to theIRS.
The IRS must hold the entire refund until the specified date, including the portion not associated with the EITC or ACTC. The reason for delaying the refund is to allow the IRS more time to investigate the possibility of identity theft and refund fraud related to either of these two credits. The IRS estimates that approximately one quarter of EITC claims are paid in error and attribute that to the complexity of the law and intentional disregard of the law (www.eitc.irs.gov/Tax-Preparer-Toolkit/faqs/fraud).
AccountingWeb.com reports that for fiscal year 2013, the IRS paid an estimated $13.3 billion to $15.6 billion in error regarding the EITC.
What Should You Do?
First, ensure that you are entitled to either of these credits. To qualify for the EITC, you must meet all of the criteria:
- Have earned income and adjusted gross income within certain limits
- Meet certain basic rules
- Either meet the rules for those without a qualifying child OR have a child that meets all the qualifying child rules for you, or your spouse if filing jointly.
You may also qualify for the ACTC which is the refundable portion of the Child Tax Credit (CTC). The CTC is up to $1,000 per qualifying child and is non-refundable (i.e. it cannot reduce your tax liability to less than zero, generating a refund). However, if you do not qualify for the full amount of CTC, you may be able to take the refundable ACTC. If you qualify for the EITC, you may also qualify for the CTC and ACTC, but there are different criteria. Namely for CTC, the qualifying child must be under age 17.
If you may be affected by this refund delay, you should still file as you normally do or schedule an appointment with us as you normally do. Once filing season begins, the IRS will process returns normally. The only change is withholding refunds until Feb. 15 for EITC- and ACTC-related tax returns that are filed early in the year. The IRS states that it still expects to issue most refunds in fewer than 21 days.
Reduce Your Refund
If you are affected by the refund delay regarding the EITC and ACTC, you can change your withholdings to get more of your money throughout the year. If you are anticipating a refund and need help with cash flow issues, it is recommended that you change your federal withholdings by updating your W4.
It’s not too late to make an adjustment to your withholding if you are one who gets a large refund. File an adjusted W-4 with your employer to reduce the amount of tax withheld from each paycheck.
If you are uncertain about the steps to take, review IRS Publication 505 (Tax Withholding and Estimated Tax) and/or Publication 919 (How Do I Adjust My Tax Withholding?). Orcontact us. We will be happy to review your situation and help you adjust accordingly. It’s your money, so it’s better to bank it now rather than wait on that refund.
Moving can be a huge headache with plenty of logistical details that must be addressed: packing, hiring a mover, disconnecting and connecting utilities, temporary storage for your things, lodging expenses for you and your family, and this list goes on. Despite the challenges associated with relocating, there may be a bright spot for you. Some or many of your moving expenses may be deductible, reducing your tax liability for the year.
The IRS first defines your home as meaning your main residence. It can be a house, condo, apartment, trailer, houseboat, or any other dwelling, but it cannot include secondary homes you may own such as a beach house.
In order to deduct moving expenses, you must meet three requirements: timing of your move (e.g. closely related to the start of work), the distance test, and the time test.
By closely related in time, the IRS states that your moving expenses must be incurred “within one year from the date you first reported to work at the new location…. It is notnecessary that you arrange to work before moving to a new location as long as you actually go to work in that location.” If you do not move within the one-year time frame, you may still be able to deduct moving expenses; however, you must show that there were extenuating circumstances that prevented you from meeting this requirement.
Next you have to pass the distance test. Your new home must be at least 50 miles farther from your former/existing home than your previous job was from your former home. As an example: If you commuted three miles to work previously, the commute to your new job location from your existing/former home must be 53 miles or greater. If that distance is shorter, you may not deduct moving expenses. If you are taking a first job or are returning to work full time, your place of employment must be at least 50 miles from your former home to meet the distance test.
Finally, you have to pass the time test. After your move, you must work full time at your new job for 39 weeks in the first year (consecutive 12 months). If you are self-employed, the time test extends to 78 weeks of full-time work during the first two years in your new location (39 weeks during the first 12 months and at least 78 weeks during the first 24 months). The IRS lists four rules regarding the time test for full-time employees:
- You count only your full-time work as an employee, not any work you do as a self-employed person.
- You do not have to work for the same employer for all 39 weeks.
- You do not have to work 39 weeks in a row.
- You must work full time within the same general commuting area for all 39 weeks.
If you are self-employed, the following three rules apply:
- You count any full-time work you do either as an employee or as a self-employed person.
- You do not have to work for the same employer or be self-employed in the same trade or business for the 78 weeks.
- You must work within the same general commuting area for all 78 weeks.
You can deduct moving expenses in the year in which you incur them as long as you expect to meet the time test within the following year (or two years if self-employed). If you ultimately fail to meet the time test after taking the deductions, you must then report the deductions as income in the year in which you fail the time test or file an amended return.
Expenses You Can Deduct
Once you meet the three requirements, there are a number of deductions you can take. First, you can deduct the cost of travel and lodging expenses for yourself and your family during the move from your old home to your new one. You cannot, however, deduct the cost of meals during your transit. If traveling by car, you can deduct actual expenses (with receipts) or take the standard mileage deduction.
You may also deduct the cost of packing, packing materials, crating, and moving company expenses. If you don’t travel by car, you can deduct the cost of shipping your car to your new home. If they can’t travel with you, you can also deduct the cost of shipping pets to your new home.
If your personal effects (e.g. furniture, household items, etc.) must be stored, you can deduct that cost as well. (Note: there are limits to the length of storage time.) You may also deduct the costs associated with disconnecting and connecting utilities.
You may not deduct any costs associated with the purchase of a new home, selling your old home, or entering or breaking a lease. If your employer reimburses you for moving expenses, you may need to include that amount as income.
If you are in the Armed Forces or if you are a retiree working abroad (or a survivor of one), different rules apply.
Yes, moving can be a headache but don’t overlook the possibility of taking all deductions that are due to you.Contact us and let us help you with all of the requirements and details. It will be one less thing for you to worry about!