Throughout your life, there will be certain significant occasions that will impact not only your day-to-day living but also your taxes. Here are 16 Life-Changing events that can impact your taxes:
- Getting Married
If you just got married or are considering getting married, you need to be aware that once you are married you no longer file returns using the single status. You generally will file as married taxpayers filing jointly (MFJ). Filing jointly will typically award you lower tax rates plus higher deductions. However, there are some situations where being married can increase your taxes. This is called the “marriage penalty”
Be aware that filing status is determined on the last day of the tax year. No matter when you get married during the year you will be considered married for the entire year for tax purposes.
- A New Baby – Growing your Family
Having a baby or claiming dependents can greatly reduce your tax. Not only can a baby grant you an additional child tax credit, but you also get access to a host of other potential tax benefits from credits for education to the Earned Income Tax Credit.
- Adoption of a Child
When adopting a child, there are tax credit allowances available. If you adopt a child under age 18 or a person physically or mentally incapable of taking care of himself or herself, you may be eligible for a tax credit for qualified adoption expenses you paid.
- Death of Spouse
In the year that you die, your spouse or personal representative will have to file a final tax return in your name, the same as if you were still alive. Depending on the make-up of your assets, an estate tax return may also need to be filed. After the assets of your estate are distributed, it is the responsibility of your heirs to file their own tax returns that include any inherited assets going forward.
Many tax-related situations will arise due to a divorce. Alimony, child support, splitting of assets, and tax returns will all have to be handled. What about property taxes and how the transfer of property may be taxed? Professional guidance will make the process less confusing and easier to navigate.
- When Paying and Receiving Child Support
Is support for the taxpayer’s children provided by the non-custodial parent to the custodial parent. It is not deductible by the one making the payments and is not income to the recipient parent.
- Educational Expenses
The cost associated with school can pay dividends in terms of job opportunities and career enhancement; it can also result in tax benefits. The American Opportunity Credit and the Lifetime Learning Credit can help offset $2,000 or more of your qualifying educational expenses. If you are paying off a student loan, you can deduct up to $2,500 of your interest on your taxes.
The cost to obtain certain professional certifications or designations can also be written off on your taxes. Through 2017, these costs can be deducted as an unreimbursed employee expense if you itemized your deductions. After 2018, only the self-employed can take these types of expenses when they qualify as a business deduction.
- Accepting a Promotion
Although a great reward, a work raise may kick you up in into another tax bracket level, increasing the amount you’ll pay on every additional dollar you earn. It’s usually a good trade-off, but worth being aware of come tax time. It might be a good idea to adjust your W-4 withholdings as well.
- Losing your Job
If you have recently lost your job, you will probably qualify for unemployment benefits. You still have to file taxes when you are unemployed if you earn over $12,000 if you are single or $24,000 if you are married. If you received unemployment compensation, you should receive Form 1099-G and repost the amount received as income.
- Sudden Disability or Accident
If you have an accident and suddenly become disabled, you may have access to some disability insurance. Should you count your insurance payments as income? What part, if any, is taxable?
- Diagnosis of Long-term Illness
Older adults often face chronic health issues that may one day take their life. They look for ways and individuals to protect their financial interests. Sadly, many other people are victims of financial abuse.
- Selling or Buying a House
When buying a home, there are many deductions you can take advantage of, including paid points, your mortgage interest, and any real estate taxes. If you itemize paying a mortgage can be tax-deductible. If you sell your home, the government requires you to pay capital gains tax, but there are exceptions if you qualify. Also, energy-efficient upgrades or the installation on medical home improvements may qualify for tax deductions.
- Moving to a Different State
If you move to a different state, you will most likely have to fill out tax returns for each state. Income taxes are figured differently in each state. Some states do not require their citizens to pay income tax. Other states have flat rates or taxes are based on your income bracket.
- You Started, Bought or Sold a Business
Depending on the type of business and how many employees you have, you must make sure your accounting practices comply with what the government requires. Certain expenses can be tax-deductible, and you will need a feasible procedure to keep up with them. In addition, personal and business expenses need to be kept separate. Incorporated business and partnerships taxes are filed on a different form, for starters. Business losses could affect how much you must pay on income from other sources. Business owners are also allowed to depreciate equipment and buildings that deduct from the taxes they owe. Also, if you work from home, or your home serves are the headquarters for your business, tax laws allow you certain deductions.
- You Inherited a Large Amount of Cash or Property
Most money received from an inheritance is tax-free. However, if you receive an IRA as part of an inheritance, you’ll probably be taxed on any distributions. If you receive property, bear in mind that there is a “step-up” to your “cost-basis” to value at the time of the decedent’s death. If the property gains in value after that, those gains will generally be taxable. Estate or inheritance taxes can be very costly. However, there is a large exemption on federal estate taxes.
Retiring changes your tax situation. Social Security payments and pensions need to be considered as income as some or all may be taxable. IRA regulations require a certain amount to be taken when you reach a particular age. Some IRA withdrawals are taxable.
Contributing to a tax-advantage account such as a 401K plan or individual retirement account can get you rewarding tax deductions, and generally, the more you put in, the better. However, once you start taking money out of your plan, expect to be taxed on that distribution.
If you have questions about the tax impact of any of your life-changing situations, be sure to give this office a call for assistance. 772-337-1040