Changing Jobs Can Affect Your Taxes by Alik MacLauchlan
Seeking out new career opportunities can have many financial implications, including taxes. When you switch jobs, your income may change along with your eligibility for certain tax deductions and credits that ultimately affect your tax liabilities today and in retirement. During these transitions, you must keep up to date with evolving laws to maintain tax efficiency and maximize your savings opportunities.
Income Tax Withholding
Employers generally withhold a certain amount from employees’ pay to cover a portion of workers’ individual income tax liabilities. The amount of federal taxes withheld is based on information you provide to your employer on IRS Form W-4, which asks you to provide your filing status, the number of dependents you claim, the tax deductions and credits for which you may qualify and any additional income you may receive.
You must take the time to complete the W-4 form correctly. If you don’t, you risk having too little taxes withheld from your pay, which could result in a larger tax bill and penalties when it comes time to file your tax returns. By contrast, if you have too much withheld from your pay, you lose out on receiving those funds throughout the year and will end up with a tax refund from the IRS after filing your returns.
In addition to income tax, employers must withhold Social Security and Medicare taxes from employees’ pay. However, high-income earners should recognize that they only pay into Social Security at a rate of 6.2 percent (or 12.4 percent for self-employed) up to a limit on their wage base, which for 2025 is $176,100. Once your earnings exceed this wage base, they are neither taxed by Social Security nor used to calculate your future Social Security benefits. This means you will see an increase in your paychecks, but you may want to consider adjusting your withholding late in the year to avoid overpaying.
Unemployment Benefits, Severance Pay and Accrued Vacation Time
When you leave a job, you may be entitled to unemployment benefits, which the U.S. government treats as taxable income that you must report on your federal tax return. Some states also have rules to tax all or a portion of unemployment compensation. However, to avoid a surprise tax bill, you may request that your state unemployment agency withhold federal and state taxes from the payments you receive after completing Form W-4V. In January, you should receive a Form 1099-G, Certain Government Payments, from the state unemployment agency showing you the total amount of compensation you received.
Severance pay and accumulated vacation and sick time off are also subject to taxes at the federal level and, in some states, your former employer is required to withhold taxes from these amounts.
Job Search and Moving Expenses
There was a time when all taxpayers could deduct some of their job search and moving expenses. This changed for tax years 2018 through 2025 with the enactment of the Tax Cuts and Jobs Act, which eliminated these deductions for all taxpayers except active members of the military under a military order and permanent change of station. Whether these restrictions will be lifted in 2026 remains to be seen.
However, current tax laws still allow individuals to avoid capital gains tax on the first $250,000 of profit resulting from the sale of a primary residence you lived in for at least 24 months of the last five years, or $500,000 for married taxpayers filing joint tax returns. If the move is due to a job change and the new home is located at least 50 miles from your prior home, you may qualify for a partial exemption from capital gains tax.
Employer-Sponsored Retirement Plans
When changing jobs, do not overlook the savings you worked hard to accumulate in your 401(k) plan with your prior employer. While you may leave your savings with your previous employer’s plan, it is not the best option. Instead, consider rolling over your existing 401(k) savings into your new employer’s plan or directly into an individual retirement account (IRA) you can set up for yourself. While cashing out the plan will result in significant taxes and penalties of 10 percent of the distributed amount, you may qualify for a taxable but penalty-free hardship withdrawal. The amount allowed depends on your unique circumstances.
About the Author: Alik MacLauchlan is a senior manager of Tax Services with Berkowitz Pollack Brant, where he provides tax advisory and consulting services to high-net-worth families and businesses in the manufacturing, professional services, fintech and retail sectors. He can be reached at the CPA firm’s New York, NY, office at info@bpbcpa.com or (646) 213-7600.
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