Changing careers can open the door to new opportunities, better income, or even a fresh sense of purpose—but it also brings a few financial curveballs, especially when it comes to taxes. Whether you’ve stepped into a new industry, started your own business, or taken some time off between jobs, it's important to know how your tax situation may shift.
Here are nine things to keep in mind when filing your taxes after a career change:
1. Changes in Income Brackets and Tax Rates
One of the biggest tax implications of a career change is a shift in your income level. If your salary increases, you may move into a higher tax bracket, meaning you’ll owe a larger percentage of your earnings to taxes.
On the other hand, if your income decreases, you may qualify for different deductions or credits that lower your tax liability. Be sure to review the latest IRS tax brackets and adjust your withholdings accordingly.
2. Impact of Severance Pay and Unemployment Benefits
If you received severance pay from your previous employer, keep in mind that it is considered taxable income. Employers often withhold taxes from severance payments, but they may not withhold enough to cover your total tax bill.
Similarly, if you claimed unemployment benefits during your transition, those benefits are also taxable. Setting aside funds to cover potential tax obligations can prevent unexpected financial strain when tax season arrives.
3. Self-Employment and Independent Contractor Taxes
If your career change involved moving into freelance work, consulting, or starting a business, your tax situation becomes more complex. Unlike traditional employment, where taxes are withheld automatically, self-employed individuals must pay estimated quarterly taxes, including both income tax and self-employment tax (which covers Social Security and Medicare). Keeping meticulous records of your income and expenses is crucial for maximizing deductions and minimizing taxable income.
4. Retirement Accounts and Rollover Considerations
A job transition often comes with decisions about your retirement accounts. If you had a 401(k) or similar retirement plan with your previous employer, you’ll need to decide whether to leave it where it is, roll it over into an IRA, or transfer it to your new employer’s plan.
Cashing out your retirement savings prematurely could result in hefty taxes and penalties, so consider your options carefully to avoid unnecessary financial setbacks.
5. Relocation and Moving Expenses
If your career change required you to move to a new location, your moving expenses may not be tax-deductible unless you are an active-duty military member. The 2017 Tax Cuts and Jobs Act eliminated the moving expense deduction for most taxpayers, so it’s important to plan your budget accordingly.
6. Education and Training Deductions
Many career changers invest in education or training to develop new skills. If you took courses related to your new profession, you may qualify for tax credits like the Lifetime Learning Credit or deductions for tuition and fees. Keeping records of your education expenses can help you claim potential tax benefits.
7. Health Insurance Considerations
A change in employment often means a change in health insurance. If you were covered under an employer-sponsored plan and had to switch to private insurance or a marketplace plan, you may be eligible for premium tax credits. Alternatively, if you had a gap in coverage, understanding potential penalties and tax implications is crucial for financial planning.
8. State Tax Differences
If your career change involved relocating to a new state, be sure to check the state’s tax laws. Different states have varying income tax rates, deductions, and filing requirements. Some states don’t impose an income tax, while others have high tax rates that can significantly impact your take-home pay.
9. Deductions for Job Search Expenses (Limited Availability)
While job search expenses were previously deductible, recent tax law changes have removed this benefit for most taxpayers. However, if you incurred expenses related to looking for a new job within the same industry, it’s worth reviewing IRS guidelines to determine whether any deductions still apply in your case.
Final Thoughts
Career changes bring exciting new possibilities - but they can also shake up your finances. Understanding the tax impact of your transition helps you plan better, avoid surprises, and make the most of available deductions or credits.
Not sure how your new job - or time off - affects your taxes? AMG Finance is here to help you navigate your new path with confidence. Whether you're self-employed, between jobs, or just adjusting to a new income level, our team can make tax season a whole lot easier.
