Whether you’re moving up the corporate ladder, changing careers altogether, or struggling through the reality of being laid off, it’s wise to understand how changes to your employment situation can affect your taxes.
Like almost everything related to your income, expect a change in your job to have an impact on your tax situation. And when it comes to taxes, the ‘how and why’ of your job transition has quite a bit of weight as well. Believe it or not, the IRS cares about why you’re leaving your current job and how you’re looking for your new job.
Since the IRS cares so much (and since the answers have a lot to do with how much or how little you may owe come April 15), it’s a good idea to be as prepared and read up on a few different scenarios below.
Severance and the IRS
Whatever walk of life you come from, the word severance tends to carry a negative connotation. It’s usually paired with being let go, laid off, or forced into retirement.
No matter what reason for your severance pay, you need to know that the IRS wants their cut.
According to Publication 525, the IRS categorizes severance pay as any form of payment “for the cancellation of your employment contract”. And this severance pay must be included as part of your income when you file your tax paperwork.
You do have the choice to reduce the amount of severance pay you receive if you decide to accept outplacement services such as learning how to write a résumé or conducting a successful interview. In this case, you must still include the original amount of severance you would have received as part of your income, but you have the option to deduct the value of the outplacement services from your overall income.
Finding Yourself Without a Job (i.e. Unemployment)
For many people who experience the sudden loss of a job, unemployment benefits are vital to keeping food on the table and paying the bills. Unfortunately, most people aren’t knowledgeable about how unemployment benefits and compensation are taxed until they experience it first hand.
Why is this important to know? You may not realize unemployment compensation is added to any other income you earned and it is still taxable.
Job Searches and Deductions
One of the few bright lights at the end of the tax tunnel is the ability to deduct job search expenses from your taxes. In many instances, you can deduct expenses for job search even if you didn’t get that particular job.
Job search expenses that are deductible range from traveling to and from interviews, resume preparation and printing, professional job placement resources, and even postage.
TurboTax is up to date with all of these tax laws and will ask you questions specific to your tax situation so that you get every tax deduction and credit you’re eligible for. Have a question? Only TurboTax lets you talk to a tax expert whose a CPA, IRS enrolled agent, or tax attorney, free.