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Actions Tax Tips After Starting a New Job
Key Takeaways
- The Rollover: A new job is an opportunity to consolidate retirement accounts.
- Beware the Overpay: If you worked more than one job this year, make sure you didn’t pay too much in Social Security taxes.
- Dig Deep: Don’t miss those often-missed deductions such as taking classes that buff-up your resume.
It’s not uncommon to switch jobs: The average worker does it 10 or 11 times in his or her career; the typical job tenure is just over four years, according to the Bureau of Labor Statistics. Unemployment remains low and job openings continue to rise, so if you took advantage of this favorable environment to land a new position last year, congratulations.
Now make sure you make the transition in a tax-smart way. As always, consult with an accountant. But here are some things to think about:
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1. If you took a class to enhance your resume, you may qualify for the lifetime learning credit, worth up to $2,000 and available if your AGI for 2020 is $69,000 or below, $138,000 or less for married joint filers. A credit lowers your tax bill dollar for dollar. To qualify, the class must help you improve or acquire a job skill.
Don’t let a new job chip away at your tax-deferred retirement savings.
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2. With two jobs last year, make sure you didn’t pay too much in Social Security taxes. Typically, your employer stops the payroll deduction once you hit the income cap, but if you left your former job and started the clock again at a new firm, you may have overpaid. You can get the money back as a credit on your return when you file.
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3. Don’t let a new job chip away at your tax-deferred retirement savings. You can roll over your old 401(k) plan into an individual retirement account or your new employer’s plan (if the company allows that), or leave the account where it is as long as it’s worth more than $5,000. One advantage of consolidating your retirement accounts when you start a new job is that you won’t end up with half a dozen plans later. “Just make sure you keep track of your money,” says Gaithersburg, Maryland financial planner Marguerita Cheng. “People get busy and forget what they have.”
What you also don’t want to do is cash out your account. If you don’t move the money into a new tax-deferred plan within 60 days, you could owe both income taxes on the withdrawal and a 10% penalty if you are younger than 59 1/2. “That’s a risk you don’t need to take,” says New York City CPA and financial planner Sallie Mullins Thompson. “Don’t do anything with the money until you have a plan.”
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4. Once you’ve settled into your new gig, make sure you’re fully taking advantage of tax-advantaged workplace plans. For starters, that means signing up for your new 401(k) or other retirement plan. Roughly half of 401(k) plans automatically enroll new employees, but that’s often at a low 3% contribution rate. Raise that at least high enough to qualify for the full company match.
Plus, open a health savings account (HSA) if you’ve opted for a high-deductible health plan (deductible of $1,400 or more for singles, $2,800 for families in 2020). Contributions are in pre-tax dollars, the money grows tax-free, and withdrawals are tax-free if you spend the money on medical expenses — a rare triple tax threat. “Any time you can save going in and going out, do it,” says Thompson.
What you can do next
Job one for the tax season: explore possible deductions with a seasoned professional – and make sure you have the records to back them up. Consult your tax and legal advisors regarding your particular circumstances.
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