Job Change Checklist

Taxes might be the last thing on the mind of someone making a job change, but failure to take them into account could make for some unpleasant surprises at tax time. Here are a few issues to consider.

Health Insurance Coverage
If you are losing your employer-sponsored health coverage, you may be able to rely on your spouse’s insurance. If not, you should know that, generally, private employers with 20 or more employees and state and local governments are required to allow terminating employees to continue their health insurance coverage, at their own expense, for themselves, their spouses, and dependent children (“COBRA” coverage). Typically, you should expect COBRA premiums to be higher because your employer will no longer be paying a portion. You may want to seek out more affordable options through the Health Insurance Marketplace.

Health insurance premiums are qualified medical expenses and, therefore, eligible to be taken as an itemized deduction. However, medical expenses are deductible only to the extent they exceed 10% of your adjusted gross income (AGI).

Last Paycheck
Your final paycheck may include — in accordance with your employer’s policies — payment for accrued but unused holiday/vacation and sick leave, unpaid commissions and bonuses, and severance or termination pay. These items will be included in your gross income for the year and are subject to both income and FICA (Social Security and Medicare) taxes. Depending on your situation, you may want to amend your W-4 (Employee’s Withholding Allowance Certificate) before the payment is made to ensure you’ll have the proper amount of income taxes withheld for the year.

Employer-sponsored Retirement Plan
If you participate in your employer’s qualified retirement plan, you’ll want to pay particular attention to your distribution options. Generally, you may either take an immediate taxable distribution or make a direct or indirect rollover to another tax-favored retirement account.

From a tax standpoint, the direct rollover is usually the preferred option when you are switching jobs because it allows you to avoid current taxes and continue saving for retirement. Typically less desirable is the indirect rollover, which would involve you receiving the money first and then depositing it in another retirement plan or individual retirement account within 60 days.

An indirect rollover presents a potential tax trap since your employer is required to withhold 20% of the balance and forward it to the IRS to be applied to your federal income tax liability for the year. You’ll have to make up that 20% shortfall with money from an outside source to complete a rollover of the full amount within 60 days. If you don’t, the 20% withheld will be deemed a taxable distribution. Depending on your age, you could incur a 10% early distribution penalty in addition to regular income taxes on the shortfall.

If you’ve taken out any loans from your employer’s retirement plan, you may be required to pay them immediately or within a specified period following termination. Failure to repay the loan on time can result in your former employer reporting it as a deemed distribution from your retirement plan. Again, you would owe income taxes and a potential additional 10% penalty on the amount.

Job Search Costs
Expenses associated with looking for a new job in the same trade or business are potentially tax deductible as a miscellaneous itemized deduction. Allowable expenses include the cost of résumés, postage, job counseling, and employment agency fees. However, miscellaneous expenses are deductible only in the amount that the combined total exceeds 2% of your AGI.