Here's some more good tax advice from the National Tax Advice Day website on changing jobs and your taxes:
As far as the IRS is 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.
First of all, you can deduct from your taxes the cost of resumes, including production, printing and mailing costs, contact calls and even travel to your interviews. You can't write off anything for which you were reimbursed, however. One more caveat: there are many restrictions on write-offs in this area including if you are changing to a different career or simply advancing yourself within your existing career.
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 to make up for the wages you aren't earning, these benefits count as taxable income under tax law. Therefore you owe federal income tax on them. You can file Form W-4V and specify the amount that you want withheld.
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. To earn 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. Making this write-off available to those who use the standard deduction could be especially important to young graduates or those who rent rather than own their homes and thus can't itemize.
If you're moving from the corporate life to self-employment, you'll now be responsible for your own tax withholding and payments 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 should be reported on Schedule C. When planning for next year, you may need to pay quarterly estimated taxes. Keep in mind that you can owe as much as $1,000 without penalty, but you have to pay that amount when you file your return if you haven't paid it in advance.
One of the most important questions facing someone changing jobs is what to do with your retirement collected through your former job. Making the wrong move could cost thousands in taxes and lower returns on your investment.
The rule of thumb among tax professionals: it's best not to touch the money. There are many tax penalties and taxes attached to early withdrawal of funds from an IRA. If you decide to have your distribution paid to you, the plan administrator will withhold 20 percent of your total account 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.
After all that, your $100,000 IRA distribution has been whittled down to less than $65,000.
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're not happy with the options through your new employer's plan, you can always opt for a rollover IRA instead of the company plan, which can be directly rolled over without penalties. If you've decided to work for yourself or prefer to manage your money yourself, the direct rollover IRA is also the plan for you. Once you reach 59 1/2 years old, you can begin withdrawals, which are then taxed as regular income.
Personally, I ALWAYS roll over the 401k into an IRA -- I don't put it in my employers retirement plan. Here are some reasons why:
1. I have more investment options in an IRA (I use Vanguard).
2. My costs are usually lower.
3. I can combine the money into other rollovers and get even more cost savings (Vanguard gives cost breaks when you have a good amount in one fund).
4. I have more (total) control over the funds.
For tax planning and filing, FMF recommends: H&R Block. Do it yourself or have us do it. It's never been easier.
Changing jobs appears to be more complex in US. To us, Indians, changing jobs have taxation angle only with reference to the income earned. Our taxation people even do not bother why we change jobs, as long as my employer deducts taxes at source and pays.
Posted by: CVR Krishnaswami | January 24, 2006 at 11:40 AM