Major life events or milestones—like getting married, having a child, or buying a new home—can have profound effects on our lives, but they may also have tax implications that need to be addressed. Not educating yourself on what these major life events mean for your taxes can result in leaving credits on the table, filing incorrectly, or even paying penalties for money owed to the IRS. Possibly a tax audit, worst case scenario.
As we approach the April tax deadline, now is an ideal time to review tax tips that will help you better understand accounting for major life events and milestones. In this article, we will take a look at the most common milestones and how to handle the tax aspects of each.
Having a child
Expanding your family can greatly alter your taxes. You may now qualify for more credits, including the Child Tax Credit, Child and Dependent Care Credit, or education credits later on. If you adopted a child, you may also qualify for the Adoption Tax Credit.
Your filing status might also change. If you are a single parent, see if you qualify to file as Head of Household. It could mean more tax benefits than if you are filing as a single.
Getting married
Congrats! If you recently got married, it is an exciting time in your life, and it can affect your taxes in some significant ways. For example, you must choose to file either Married Filing Jointly or Married Filing Separately.
If you recently changed your name due to marriage, you must change your name on all legal documentation, starting with your Social Security card. Don’t forget to update your name with your bank, job, insurance, and Driver’s License. This can affect your taxes, so make sure you update your name before filing. It can be a lengthy process, so get started ASAP.
Divorcing or separating
A lot of things change as a result of divorce, including your tax situation. You might need to change your address, your name, or your W-4. Additionally, you’ll need to know how to treat alimony, child support, property settlements, and more on your tax return.
Child support is entirely tax-neutral, so those payments — whether you pay them or receive them—do not affect your taxes. Custody, on the other hand, can impact your situation. Only one parent can claim a child as a dependent on their taxes (when you are not filing jointly). This will have a direct effect on which tax breaks you qualify for. The Child Tax Credit, Child and Dependent Care, and the EITC are some of the most important credits available to parents with qualifying dependents.
If your divorce was settled after January 1, 2019, you should not deduct alimony you paid to your former spouse, and you don’t need to report it as taxable income if you are the one receiving alimony.
Getting a new job
When you start a new job, you must fill out Form W-4. Check your withholding percentages to make sure your new company is withholding the correct amount of money from your paycheck for taxes. You should check your withholding percentages whenever a new life event occurs, and when the tax laws change – not just when you get a new job.
If you pick up a second job or start earning income through self-employment, your income will likely change. This affects how much you are expected to pay in income tax. It can also impact the amount you get for certain income-dependent tax credits. For example, the Earned Income Tax Credit is calculated based on your AGI, the number of qualifying dependents you claim, and your filing status. A change in your income could result in a larger or smaller credit.
If you are self-employed (either as a second job or your primary source of income), you may get to write off business-related expenses like a home office and mileage, as long as the expenses are ordinary and necessary for your job.
Losing your job
When you lose your job, you may qualify for unemployment benefits. Those benefits are taxable, and you will still need to file a tax return if you meet the minimum income requirements for your filing status. At tax time, you will receive Form 1099-G. This is the form you will use to report your benefits.
Retiring
As you approach your golden years, it’s a good time to brush up on the tax implications of your chosen retirement plan. A great place to start is to seek answers to questions like “Does my retirement account require minimum distributions?” “Should I withhold taxes?” and “Will my social security be taxable?”
Seeking guidance from your plan service provider and a tax expert will help provide you with a full view of your financial future and how you will be taxed when it’s time for you to cash out on your retirement. There is a lot to know about Social Security, IRAs, and other retirement plans. You may be eligible for a credit for making contributions to your retirement savings. If you need to make an early withdrawal from your retirement account, you might owe a tax penalty.
Buying a new home
Buying a new home is a big financial step. If this is your first home, there are several tax breaks just for homeowners that you’ll want to consider. Mortgage interest, property tax, state and local tax, and certain home improvements may all be claimed on your tax return. Buying a house is already a major expense, which is all the more reason to make sure that you’re not leaving deductions on the table for things like real estate taxes or mortgage interest. To claim these deductions, be sure to itemize them on your tax return, if you are able. Deductions you may be eligible for pertain to mortgage interest, mortgage insurance, real estate tax, and capital gains exclusions upon the sale of your residence.
Death
Losing someone is one of the hardest life events we face, and taxes are likely the last thing on your mind in the wake of a tragedy. Knowing the right questions to ask when tax season rolls around can make the process a lot less stressful. If you received an inheritance from an estate at the loss of a loved one, taxability is dependent on how the assets and their bequeathal were set up. Be sure to seek counsel from a tax professional to review anything included in your bestowal to ensure your accounting accurately for your inheritance.
Having a basic knowledge of how life’s biggest milestones may impact the way you file your taxes is essential to ensuring that tax season goes smoothly for you and your family. That being said, working with a tax professional is a great way to ensure that you’re not missing out on any beneficial deductions or credits this year, or in the years to come.
Conclusion
The IRS website has a very in-depth list of major life events and how they affect your taxes. You can read the information by following this link. Also, there are helpful tools that will streamline your taxes by converting your bank statements to PDFs for ease in filing your taxes.
Educating yourself about how any major life events affect your taxes is empowering! Share this article so your peers can benefit from the information we have offered. They will thank you at tax time.
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