Wintrust Financial : Tax Rules to Remember When Searching for a New Job

In the pandemic economy, the labor market has arguably shifted most dramatically from the peak of the recession to now. During the peak, jobless rates reached record highs. Then, by 2021, 33 million people quit their jobs - many to take a new position elsewhere - in what many have dubbed the "Great Resignation."

But one through line has remained through this sling-shot experience: when it comes to any job, prepare for change. And change in this arena has financial implications. In the excitement of a new job or during the dread of a job search, taxes often get overlooked. Yet, taxes remain a key part of the job search, one that you can minimize if you prepare.

Read on to see how you can plan for taxes whether you're searching for a job or you already landed that dream position.

File your taxes even if you're unemployed

Giving up any additional funds you have in the bank to Uncle Sam hurts most when you're unemployed. With attention and energy focused on finding a job and securing your finances, the last bill you want to pay is one to the U.S. government. But even when you're collecting unemployment income, you pay taxes on the checks. Further, any severance you received from your job for the layoff also counts as regular income that you owe taxes on.

Despite the fear that this might bring, it's important to remember two facts:

1. Just because you file taxes doesn't mean you will owe taxes. If your job pulled money out for you while you worked, then you've already paid taxes on much of the income you earned. Plus, many companies will account for taxes when they send your severance check.
   
2. By reducing your income due to the job loss, it's possible that you've moved down a tax bracket. Any withholdings that your company made prior to your departure at the higher bracket would then potentially leave you with the opportunity for a refund come tax season.

While tax season may be an unwelcoming time due to the job loss, it's important to remember it may not hit so hard. To best prepare, set aside the amount corresponding to your tax bracket last year when receiving unemployment checks if your finances allow. For instance, if you were in the 22% bracket and you receive a $500 unemployment check every week, set aside $110 for federal taxes, just in case. Do the same for state taxes, based on your state's tax rates.

If you owe, then you'll be prepared. If instead you earned a refund, then you'll have an additional boost to your finances that you can use during the job search.

Deduct everything you can

It used to be that when you filed your taxes while searching for your next job, you could deduct almost any small expense. However, the Tax Cuts and Jobs Act passed in 2017 reduced the impact of this tactic.

The change was most evident in the higher level of automatic deductions under the new law, which is $12,550 for a single filer and $25,100 if you are married and filing jointly. The automatic deduction increase also creates a higher bar to itemize deductions. If you don't deduct beyond the automatic deduction amount, then it's not worthwhile to itemize.

The second change impacts who can deduct amid the job search. Two important stipulations were added: you now must search for a job in the same field you currently work in, and you can only deduct for a job search one time.

Despite these limitations, what you can deduct remains fairly broad, ranging from the cost of a career coach to travel expenses when interviewing to the fee for hiring an employment agency. If these costs passed the automatic deduction line, then make sure to itemize on your tax form.

Prepare for the job switch

If you're leaving your current job and joining those partaking in the Great Resignation, there's a good chance that you have found a new position with better perks, a greater challenge and higher pay. That third aspect - higher pay - can have a significant impact on your tax form.

If your new job moves you up a tax bracket, make sure to fill out the W-4 form at your new company correctly to avoid facing a big tax bill at the end of the year. Using the IRS Tax Withholding Estimator will help protect against this situation.

With the higher pay, you can also take steps to decrease your overall tax requirement. Any money you save in a 401(k) or individual retirement account (IRA) can be done tax-free. You don't owe money on that amount until you withdraw from the account when you're older. This can cut your income down when reporting to the IRS, reducing your overall tax concerns. It's a tax-saver, one that you can use no matter what job you land next.