After investigating your options, you may find that it makes more sense to move your 401(k) balance to your new employer’s 401(k) — assuming the plan accepts rollovers and offers an attractive range of investment choices — or to an IRA. By rolling over your savings from your former employer’s 401(k) plan to an IRA, you may have more freedom to choose your investments. Opportunities for taking penalty-free early distributions may also increase.
For example, you are generally permitted to withdraw money from an IRA penalty free to cover the cost of health insurance premiums if you have been collecting unemployment compensation for at least 12 weeks, or to pay for qualified higher education expenses, or for the purchase of a first home. You may also want to consider rolling over your 401(k) savings into a Roth IRA instead of a traditional IRA. While you will have to pay tax on the amount rolled over into a Roth IRA, all withdrawals in retirement will be tax free.
For another great tax strategy, in some cases, you may also be able to deduct certain expenses incurred while you are out looking for a new job. You are not, however, permitted to deduct these expenses if you were searching for a job in a new occupation, or if there was a long break between the end of your last job and your new search. If you meet the requirements set forth by the IRS, you are permitted to deduct a wide range of job-seeking expenses, including employment agency fees, the cost of preparing and sending out copies of your résumé to prospective employers, and any phone and fax expenses associated with your job search. In some instances, travel expenses related to looking for a job or attending a job interview may also be deducted. However, it's important to note that these expenses must be claimed as a miscellaneous itemized deduction, and the total of all of your miscellaneous deductions must exceed 2 percent of your adjusted gross income (AGI) before job search expenses become tax-deductible.
If your new job requires you to relocate, you may be able to deduct some of your moving expenses that are not reimbursed by your employer. You can take advantage of this tax help provided that your new workplace is at least 50 miles from your old job (a.k.a. the distance test), and the new job provides full-time employment for at least 39 weeks over a 12-month period. Deductible moving expenses include the cost of packing and shipping your household goods and personal possessions, as well as insurance and up to 30 days of storage. You can also deduct the cost of traveling to your new home one time, including hotels but not meals. If you use your own car for the move, you may claim the actual expenses for gas and oil, as well as parking and tolls, or you can use the standard mileage rate to calculate your deduction. Note that it is not necessary to itemize to claim this deduction.
Because of the generous capital gains exclusion on selling a primary residence, it is unlikely that you will be subject to federal taxes if you have to sell your home when changing jobs. If you owned and lived in the house you are selling for two out of the 5 years prior the sale, you are generally permitted to exclude up to $250,000 of the capital gain from your taxable income if you're a single filer ($500,000 of the capital gain if you are married and file jointly). So, even if you rented out your home for a period of time before selling it, the house may still qualify as your primary residence if you lived in it for at least two years out of the 5 years preceding the sale.
Getting a new job can be an exciting and rewarding experience. Make sure you are prepared to make the most of it by taking advantage of the tax help that is available and developing a good tax strategy.