“When the devil loses his job, he becomes a tax collector.”
– Greek Proverb
ACTUAL CASE HISTORIES: It goes without saying: just as it is wise to look before you leap, when changing jobs, so too is it wise to consider the many steps you can legally take to minimize your future tax liabilities. Taxes are part of every employee’s life, but that does not mean that you must pay more than you need to. To the contrary, you can take into account the tax issues of a job change when (i) planning for it, (ii) negotiating it, (iii) taking steps during it, and (iv) even when completing your tax return.
Because I am not educated or experienced in tax matters, I cannot give tax advice or counsel on tax matters. That said, I can make certain suggestions regarding tax thoughts, and suggest – as I do with my clients – that employees consult with qualified tax counsel or tax advisor in contemplation, navigation and negotiation of job changes.
LESSON TO LEARN: Taxes are inevitable, but the amount you owe is capable of being legally reduced by taking appropriate steps to do so. But first, you must know what they are, and only then can you wisely navigate and negotiate to that end, after consultation with your personal tax advisor.
Note that, as I am not a tax law practitioner, this blog post cannot be considered tax advice. Additionally, this blog post is written and published in June, 2017. As tax-related laws change over time, you might want to ask your tax advisor whether the law has changed since this blog post was published.
WHAT YOU CAN DO: Paying taxes is required by law, but there is no law that requires you pay more taxes than you are required. Here are ten “tax thoughts” to consider, and to share with your tax advisor, when expecting, planning, and in the midst of a change of jobs:
1. Job Hunting Expenses – You are entitled to deduct, as an itemized deduction, job-search expenses if the job you are seeking is in your present line of work. This deduction is not applicable to searches for a first job in a particular industry or field. Deductible expenses include (a) resume preparation services, (b) resume printing and mailing services, (c) fees paid to employment agencies, and (d) costs of travel related to the job search.
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2. Moving Costs – If your job change requires that you relocate, your moving costs and costs to travel to your new location are deductible. However, certain “tests” must be met: (a) the main location of your new job must be at least 50 miles farther from your present home than is the main location of your present home. (b) Also, employees must work full-time at least 39 weeks in the 12 months following the relocation to be eligible for the deduction.
Deductible moving expenses include the cost of moving household and personal effects, as well as transportation and hotels – not including meals – incurred in getting to your new home.
3. Costs of Selling Your Home – As a general rule, when you sell a home the law permits you to defer paying tax on the first $250,000 of profit, $500,000 for a married couple, provided you have lived in that home continuously for two years. For those relocating for job changes the IRS rules permit a partial exclusion of this profit; for example, if you lived in the residence for one year – not two – then you can exclude one half of the $250,000 profit (or one half of the $500,000 profit.)
4. Withholding Adjustments – Each employee is required to file an IRS Form W-4 on which he or she instructs his or her employer on the number of allowances claimed. A form W-4 is customarily provided to a new employee to fill out and sign on his or her first day on a new job. These allowances determine how much of your paycheck is withheld before payment to you. Starting a new job is an opportunity to adjust that number for a number of reasons, including new children, periods of time out of work, etc.
To avoid over-paying or under-paying your taxes, carefully read the instructions on the W-4 tax withholding form given to you by your new employer.
5. Transfer of Retirement Savings – Many people make two “tax mistakes” in the course of a job change. The first is having retirement monies sent from your former employer’s retirement plan directly to you, with the thought in mind of putting it into your own account, and then redirecting it to your new employer’s plan, or a different retirement account in your name. If you are not careful (I must admit, once I was not), and you are under the age of 55 in the year you leave your job, you just might have to both pay tax on the entire amount, PLUS a penalty of 10% on the entire amount. OUCH! It is much better to have retirement monies paid from one plan directly into the other, often called a “trustee-to-trustee transfer.”
The second mistake many people make is not considering whether to maintain their retirement monies in their former employer’s retirement plan, which just might have more desirable investment choices or lower fees and charges associated with it.
6. Severance is taxable – Many people ask whether severance payments are taxed as income, and the answer is a clear “Yes.” It is a kind of “replacement” income, and so will be reported to the government as a kind of income, which is of course taxable.
Please anticipate that, if your severance is paid to you in a “lump sum,” it will likely seem to be more highly taxed than is your usual weekly or biweekly check. That is because employers are required to calculate taxes on a “lump sum” as if that “lump sum” was paid to you each pay period throughout the year.
It is for this reason that we commonly suggest to our clients that they take this opportunity to adjust the withholdings on their W-4 form, to reduce the tax taken out at this time, which will make more money available to you now, but of course increase the taxes due with your next annual tax return. (If interested, review again Section 4, above.)
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7. COBRA and unemployment benefits are taxable, as well – Regardless of whether an employee resigned or was terminated, sometimes former employers pay health premiums or reimburse their former employees’ insurance premiums for a period of time. Those whose former employers are paying either all or some portion of their post-employment health insurance premiums should understand that any such employer payments are taxable income to the employee. While employer contributions to a present employee’s health insurance is not taxable to the employee, employer contributions to a former employee’s health insurance is taxable.
Unemployment benefits, too, are taxable, as well. So are payments for accrued but unused vacation days, sick days or PTO days.
8. Those expatriating to a different country for a new job should insist on “Tax Equalization” – If, for example, you live in Switzerland, and your new job entails your relocating to England, you may find out that income taxes are higher in England than the income taxes you are accustomed to in Switzerland. Additionally – believe it or not – if you are a resident of Switzerland and live and work in England, both England and Switzerland may claim that each has the right to tax your entire income, resulting in your being required to pay income tax to both countries. In this event, you should request from your new employer that they commit to provide you what we call “tax equalization.”
Tax equalization means (a) that your employer pays you a salary that will result in your “taking home,” after taxes, the same amount that you would have “taken home,” after taxes, if you had remained working in your home country. Tax equalization generally means, too, (b) that your new employer will hire one of those few accounting firms that engage in this work, and pay their fees to ensure that your tax calculations and tax returns to both countries are correct.
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9. Consider State and Regional “Tax Equalization,” as well – Suppose you live and work in one of the seven U.S. states that do not have a state income tax (namely, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming) and your new job has you relocating to New York or California, two of the states with high state income taxes. New York’s state income tax rises to as much as 6% of your income. If you are making such a move, do not hesitate to ask your new employer take that into account when determining your compensation level.
10. Don’t forget costs necessarily incurred to perform your new job duties – Lastly, this is a category of potential tax deductions that is quite often missed by job changers because of the many other things on their minds during job transition times. They might include special clothing, a new computer or other equipment, uniforms, and even attorney’s fees to review and negotiate your employment contract, if given one.
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In Summary . . .
When changing jobs, there is a lot to think about. Considering the tax implications, ramifications and potential deductions available to you should be one of those things to consider, carefully, with the aid of a tax advisor. These “Ten Tax Tips” are not tax advice, but instead are intended to spark your discussions with your tax advisor.
P.S.: If you would like to speak directly about this or other subjects, Mr. Sklover is available for 30-minute, 60-minute, or 120-minute telephone consultations. To obtain your consultation, just [click here.] Evenings and weekends can often be accommodated.
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SkloverWorkingWisdom™ emphasizes smart negotiating – and navigating – for yourself at work. Negotiation and navigation of work and career issues requires that you think “out of the box,” and build value and avoid risks at every point in your career. We strive to help you understand what is commonly before you – traps and pitfalls, included – and to avoid the likely bumps in the road. For those with upcoming or present job transitions, review and negotiation of tax matters should be considered a critical part of your necessary tasks, a necessary element of your employment “navigation and negotiation.”
Always be proactive. Always be creative. Always be persistent. Always be vigilant. And always do what you can to achieve for yourself, your family, and your career. Take all available steps to increase and secure employment “rewards” and eliminate or reduce employment “risks.” That’s what SkloverWorkingWisdom™ is all about.
*A note about our Actual Case Histories: In order to preserve client confidences, and protect client identities, we alter certain facts, including the name, age, gender, position, date, geographical location, and industry of our clients. The essential facts, the point illustrated and the lesson to be learned, remain actual.
Please Note: This Email Newsletter is not legal advice, but only an effort to provide generalized information about important topics related to employment and the law. Legal advice can only be rendered after formal retention of counsel, and must take into account the facts and circumstances of a particular case. Those in need of legal advice, counsel or representation should retain competent legal counsel licensed to practice law in their locale.
Sklover Working Wisdom™ is a trademarked newsletter publication of Alan L. Sklover, of Sklover & Company, LLC, a law firm dedicated to the counsel and representation of employees in matters of their employment, compensation and severance. Nothing expressed in this material constitutes legal advice. Please note that Mr. Sklover is admitted to practice in the state of New York, only. When assisting clients in other jurisdictions, he retains the assistance of local counsel and/or obtains permission of local Courts to appear. Copying, use and/or reproduction of this material in any form or media without prior written permission is strictly prohibited. All rights reserved. For further information, contact Sklover & Company, LLC, 45 Rockefeller Plaza, Suite 2000, New York, New York 10111 (212) 757-5000.
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