You just accepted a job offer - congratulations! Ending your search and beginning the next phase of your career is an exciting time. You’re understandably concerned about making a great first impression and learning the ropes. But, it’s important to understand how getting a new job impacts your taxes. Don’t worry, we’ll fill you in.
Prior to 2018, you could deduct job search expenses and moving expenses associated with assuming your new role on your taxes. But, the Tax Cuts and Jobs Act of 2017 ended these and many other itemized deductions. However, if you’re active duty military and have been ordered to move to a new, permanent station, you can still write off costs associated with your relocation.
You may need to sell your home and relocate for your new position. If you’ve lived in your house for at least two of the last five years, the first $250,000 of profit is exempt from the capital gains tax. But, if you have to move sooner than that due to your new role, you could be eligible for a partial exemption. For example, if you’ve lived there for one year, you may be able to avoid paying capital gains on the first $125,000 of profit.
When you leave a job, you’ll have to decide what to do with your retirement account. Fortunately, you have a few options. Depending on your situation, you could choose to:
Leave the money where it is
Roll the funds over to a new retirement account
Cash-out the account
If the investments in your account are performing well, it may make sense to leave the money where it is. If you go this route, you won’t have to worry about any tax implications. But, if you decide to roll the funds over to a new retirement account and you request a check to deposit the money on your own, your former account holder will withhold 20% for federal income taxes.
Cashing the account out has the biggest tax impact - especially if you’re under age 59.5. Withdrawn funds are subject to income tax. Plus, you’ll likely owe a 10% early withdrawal penalty when you file your taxes (unless you meet one of a few very specific hardship exemptions).
Hopefully, your new job comes with a significant salary boost. If that’s the case, the income bump could put you into the next tax bracket. Moving to that next bracket will mean paying a bit more to Uncle Sam.
However, since the United States has a progressive tax system, the hike may not be as steep as you think. That’s because the new tax rate only applies to the income that exceeds the threshold for that bracket. Here’s an example:
Say you go from earning $86,375 per year (top of the 22% bracket) to $100,000 per year (within the 24% bracket). Only the $13,625 difference will get taxed at the higher rate. The remaining salary will be taxed according to the corresponding bracket’s rate. Based on this example, your salary will get taxed at four different rates because segments of it fall into four different tax brackets.
During your first day on the job, you’ll have to complete a stack of new hire paperwork. When you fill out Form W-4 for tax withholding, take a moment to think about recent changes to your personal situation. Have you gained or lost dependents? Gotten married or divorced? Started a side gig or small business?
All of those scenarios can impact your tax liability, and therefore influence how much tax should be withheld from each paycheck. Even if you didn’t have any major recent changes, think about your last tax return. If you got a large refund, you could change your withholding, so you get to keep more of your earnings each payday.
How Rapidly Can Help
If you have questions about how getting a new job impacts your taxes, or you need general tax advice, Rapidly can help. We’re an online platform that matches individual taxpayers like you to qualified tax professionals. It’s free to get started. Fill out a brief online form and quickly get connected to an expert that’s ready to guide you.
Securing a new job is a time of excitement (and relief). But, like any life change, it comes with financial impacts that may not be obvious. Hopefully, you now understand how getting a new job impacts your taxes. Best wishes to you in your new endeavor!