If you’ve managed to land a new job in this economy, congratulations are in order. As of November 2010, the nation’s unemployment rate remained at a historically high 9.3%. Furthermore, unemployment rates in states like Nevada, Florida, and Michigan are higher still. Such high unemployment rates mean many job switches aren’t voluntary and often lead to out-of-work periods far longer than anticipated. But luck you – you’ve moved from searching for jobs, which is a tax write-off, to landing the big one! Here are four tips to keep in mind as you transition to your new role (and new income).
Tip 1: Don’t Overpay your Social Security Tax
If you have two or more employers during any year, each is required to withhold the Social Security (or FICA) tax up to the annual earnings cap. (In both 2010 and 2011, the cap is $106,800). If your total earned income from two or more jobs exceeds $106,800, you will have excess FICA withheld. The only way to have that money returned to you is to properly file your 1040, including the excess on line 69.
Tip #2: Don’t Forget – Unemployment Compensation is Taxable
Surprise! Any unemployment benefits you receive are taxable. Although the law for 2009 allowed up to $2,400 of unemployment benefits to be tax-free, no such provision exists for 2010 or 2011. As such, expect to report all of your unemployment benefits on line 19 on your Form 1040 – and to pay tax on all of it. Hey, at least there’s no FICA or Medicare tax on unemployment compensation.
Tip #3: Deduct your Job Search Expenses
If you spent money looking for a new job in the same profession as your old job, some of those expenses are tax deductible. Deductible expenses include copying and mailing of your resume, as well as employment and outplacement agency fees. Furthermore, if you travel to look for a new job, you can write off the travel expenses necessary to get there and back. Of course, you can only deduct the travel expenses if the trip is primarily to look for a new job. If you fly to St. Lucia on holiday and briefly inquire about a position behind the bar, you can’t deduct your vacation. Note that job search expenses are only deductible as a miscellaneous itemized deduction. In other words, you only save tax dollars to the extent all of your miscellaneous itemized deductions — including, for example, your purchase of TurboTax — exceed 2% of your adjusted gross income (AGI). If they do and you itemize, you’ll save money as a result of your job search expenses. Otherwise, you won’t.
Tip # 4: Write off those Moving Expenses
Moving expenses related to a new job are tax deductible if they meet certain conditions. First, you must have moved a ways, usually out of your immediate metropolitan area. Specifically, your new job must be at least 50 miles farther from your old home than your old job was from your old home. If you just landed your first job, your new job must be at least 50 miles from your old home.
In addition, you must stay at your new job for at least 75% of the next year (or two years if you will be self-employed). If something unavoidable happens, such as a disability or a lay-off, this second condition is waived. Deductible moving expenses include the costs to move you, your family, and your things. You cannot deduct house-hunting trips or real estate commissions. The moving expense deduction can be a valuable one for, unlike job search expenses, the moving expense deduction is an “above the line” deduction. This means you don’t need to itemize to take advantage of the tax deduction and save real money on your taxes.
Congratulations on the new job. By following these tips, you’ll be sure to maximize the amount of that new salary you’ll get to keep.