5 Tax Moves to Make If You're Starting a New Job
If you're starting a new job in 2016, or made a recent change, congratulations! Here's hoping your new workplace offers you more money, new growth opportunities, and better management.
You also may find yourself with a few new tax-prep tasks on your to-do list, however, since a job change is one of the big life events that experts say should prompt you to evaluate your taxes. Yes, April is a long way off, but laying the groundwork now can help lessen any bite the taxman takes. Here are a few moves to make now.
Claim eligible job-search expenses. "Many people don’t realize that the expenses that come with a job search can be tax deductible," said Lisa Greene-Lewis, a CPA and tax expert with TurboTax. If you paid for career counseling or resume preparation help, hired a headhunter, spent money mailing or calling job leads and traveling to job interviews, you can deduct those expenses. If your new job requires relocation, moving expenses not paid by your employer are deductible (the new job has to be 50 miles further away from your house than your old job was.) There are a few caveats, Greene-Lewis said. These deductions don't apply to your first job, and the new job has to be in the same field as your last one. What's more, you can only deduct expenses above 2% of your adjusted gross income.
Check your withholding. If that new job comes with a big bump in your paycheck, you might want to reconsider how much you have withheld from each check, suggests Mark Steber, chief tax officer at Jackson Hewitt. "You have to pay a lot more attention to those exemption allowances," he says. This also applies if you are in the same job and get a large raise, since a significantly bigger paycheck could bump you into the next tax bracket, increasing the amount you'll owe Uncle Sam come tax time. If this is the case, Steber suggests increasing your withholding rate, then checking in the middle of the year to see if you're on track or need to make any adjustments from there.
Don't delay your retirement rollover. Unless your previous employer has a real standout plan—you can check it out on BrightScope—most experts recommend rolling over your retirement savings, because it's easier to keep track of assets if they're all in one place. (You can move funds directly into your new employer's 401(k) plan, if it's a good one, or into a rollover IRA account.) If you do cash out retirement savings from your old job, keep a close eye on the calendar. "Once you cash out of a retirement plan, including a 401(k), you have just 60 days to reinvest in another qualified plan," Steber said. After that cutoff, you'll owe taxes as well as a 10% penalty on the amount.
Look broadly at benefits. Your retirement account isn't the only way to shelter funds. "Be aware of other benefits offered by the employer in order to maximize benefits and tax advantages," said Bernie Kaplan, managing director at accounting and consulting company CBIZ MHM. For instance, if your new health care plan gives you the opportunity to contribute to a flexible spending account or health savings account, you should consider it, since contributions are made with pre-tax dollars and can reduce your tax burden.
Ask about local taxes, too. "Some locales are well known for high state and local taxes," said Emily Sanders, a CPA and managing director of United Capital. For instance, New York and California are both notorious for high income taxes. Even if you commute to your high-tax job site over state or municipal lines, make sure you know how much that will cut into your take-home pay. "Be cognizant of your combined tax bracket—federal, state, and local," Sanders said.