Have you ever wanted to change careers, but quickly discovered that everything else you’re qualified to do pays about half what you’re making now? It’s a common discussion among members of Generation X as we’re hitting midlife and seeking more career fulfillment. How can anyone survive on half their salary? It isn’t easy, but it also might not be as hard as you think.
Disclaimer: Much of the following discussion includes commentary about taxes in the United States. Note that the writer is not a qualified tax advisor, and your specific tax filing requirements will depend on several factors including your financial situation, your family, your country, and your state if you live in the USA. Please consult your tax advisor and carefully research the tax laws that apply to you before making any important career or financial decisions. We now return you to your blog post.
Welcome back. Now let’s talk about how people who either quit or lose their jobs manage to survive and thrive.
Apply for Temporary Assistance
The most obvious first step if your employment separation was involuntary is to take advantage of any severance or unemployment benefits that might be available to you. Right now, a lot of people are being affected by the economic downturn due to the COVID-19 pandemic. Your former employer may be able to help with the transition, or you can check out 211.org for resources as well as usa.gov/unemployment. Additional resources are listed at the bottom of this post for those experiencing a financial emergency.
Whether your career transition was voluntary or involuntary, you’ll want to minimize your expenses until things return to normal. Check out 50+ and Considering Semi-Retirement as a Career Transition for a great list of ways to reduce monthly expenses and find temporary income. If you are concerned about health insurance for yourself and your family, be sure to check out healthcare.gov for available income-based subsidies to help pay premiums.
Go from “Unemployed” to “Self-Employed”
No, this is not just a way to fill a time-gap on a resume.
Whether your career transition was planned or unplanned, you probably need to find another source of income. Chances are, this will either involve going to work for another employer (earning something close to minimum wage) or becoming self-employed. If you’re unsure how to immediately become self-employed, check out Diversifying a Career Transition: One way to Regain Control of your Life and Should You Consider Crowdsourcing Jobs as Part of a Midlife Career Transition? for ideas on how to get started.
Why would you want to do this? Many people find a self-employment strategy to be quite helpful in legitimately minimizing tax liability and maximizing income during a career transition and/or semi-retirement.
Self-Employment Tax Deductions
Tax deductions for self-employed professionals are handled separately (over and above) the standard tax deduction. A few years ago the IRS increased the standard deduction for most taxpayers thus eliminating the need for many employees to itemize deductions like moving expenses, (some) charitable giving, tax prep fees and medical expenses (more here). But deductions for business expenses are still handled seperately, and will further reduce the amount of income that is taxable for many self-employed professionals. Examples of tax deductions you might be able to qualify for include:
Home Office: Depending on the size of your office in relation to the size of your home, you may be able to deduct a portion of your rent or mortgage interest, utilties, maintenance, and insurance. If your Internet and phone are necessary for your business, you may be able to deduct a percentage of the cost of that equipment and those monthly services as well. The Balance Small Business has details.
Travel and Transportation: If you either use your vehicle for work, or simply need to travel to appointments or drive to pick up supplies, you will want to check out the mileage and depreciation deductions available to you. Investopedia has great information.
Meals and Entertaining Clients: If networking and schmoozing clients is central to your success in your new business, you may be able to deduct those expenses. The IRS has very specific rules about this, so be sure to check out the most current list of legitimate business expenses here.
Insurance, Investments, Business Expenses: Take a look at your last paystub from your current or previous employer. For each of those deductions from your pa, there’s a pretty good chance there is a corresponding tax deduction that you can now use to reduce the amount of taxes you need to pay as self-employed professional. Investopedia has an amazing list of deductions you’ll want to explore.
Work-From-Home Cost Savings
If you have been working in a corporate office and now find yourself working primarily from home, you might be surprised at how much less it actually costs to work from home. In addition to the tax savings mentioned above, your spending might be greatly reduced. Skip the Drive has a calculator. Results will vary, but common savings include gas, auto maintenance, clothing expenses, and meal costs.
If you are transitioning from working as an employee to working for yourself, do not focus on the gross salary you were making at your former job. Instead, look at your take-home pay and focus on maintaining that amount of income. That’s the amount you’ve actually been living on. By using your existing resources wisely and taking full advantage of the benefits and tax deductions available to self-employed professionals, your career transition can be a smooth one.
- GenXrestrux: Check out 50+ and Considering Semi-Retirement as a Career Transition
- GenXrestrux: Diversifying a Career Transition: One way to Regain Control of your Life
- GenXrestrux: Should You Consider Crowdsourcing Jobs as Part of a Midlife Career Transition?
- Investopedia: 15 Tax Deductions and Benefits for the Self-Employed
- The Balance Small Business: Calculate Your Home Business Space Deduction
- IRS: Publication 535 (Business Expenses) and the Gig Economy Tax Center
- Inkwell Editorial: 12 Money Moves Every Freelancer Should Make During the Coronavirus Pandemic
- Skip the Drive: Telecommuting Calculator
- Forbes: Financial Help For Freelancers And Independent Contractors Affected By The Coronavirus Crisis
- Zacks: Can I Deduct Business Expenses & Still Have a Standard Deduction?
- Jackson Hewitt: How do I file taxes if I’m self employed?
- TurboTax: Top Tax Write-Offs for the Self-Employed