When your life changes, so do your taxes.
Major events often set the tone for our lives. They include celebrations like getting married or having a child, as well as more challenging events like the loss of a loved one. Some are planned while others are not.
On one level, these things impact emotions and perspectives. They also affect our finances by creating tax burdens. Knowing how these occurrences might impact your taxes or finances in general, can help you handle major life events when they happen, even if you’re not feeling well because of those events.
The problem is that recent tax changes can be confusing. A 2019 study from the Association of International Certified Professional Accountants found that 45 percent of Americans have no idea when they last updated their W-4 withholding information and most purposefully pay inaccurate amounts of taxes throughout the year.
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Changing your relationship status is one major life change that affects your taxes. If you get married, some tax savings may result from the union. You can decide to file separately or jointly but typically filing jointly offers more tax benefits.
Even if you got married on the last day of the year, the IRS will still consider your tax situation as if you were married the entire year. The tax benefits might even help offset the cost of those nuptials.
Kids change everything in so many ways, including your lifestyle and your budget. Your taxes evolve too. Each child results in an additional child tax credit. Other benefits include the Earned Income Tax Credit, 529 plans, credit for dependent care costs, and credits for education.
In order to start leveraging these tax benefits, each child will need a tax identification number or Social Security number.
3. Job change
There are many types of job changes that affect your taxes. They include promotions, job losses, or the launch of a small business.
If you lose your job, you may find you get a large tax refund if you’ve been employed throughout the year and had the proper withholding in place. Know that if you get unemployment benefits from the government, that is considered taxable income. If you have a working spouse, you may need to adjust their income tax withholding to help. Also, know that job-hunting expenses may be deductible.
If you get promoted, you may be making more money. Be aware of how that adds up. It could catapult you into a new tax bracket where you end up paying more. Adjusting your W-4 holding may help you avoid a big payout at tax time.
If you started a side gig or gave up your traditional job to start a business, you’ll need to think about the impact of this change on your taxes. With side gigs, you typically get earned income, which isn’t taxed when you receive it. You’ll need to put money aside for estimated tax payments and keep detailed expense records for potential itemized deductions.
Buying or selling a home both trigger some tax changes. When you buy a home, you can deduct things like mortgage points, mortgage interest, and real estate taxes.
If you purchase a home and use it as a rental or vacation rental, then there will be other costs and deductions you can calculate.
Even when you sell, there are some tax rules to consider, especially if you’ve made money on your home above the original purchase price. You can avoid capital gains tax on up to $500,000 if you file jointly. If you’re single, you can avoid capital gains taxes up to $250,000.
5. Major move
Prior to the 2018 tax year, you could deduct moving expenses from your taxes if you meet IRS requirements for distance. However, this tax benefit has changed. Now, only active-duty military personnel can qualify for moving expense deductions.
Also, be aware that if you move out of state, you’ll need to file part-year state tax returns in the state you moved from and the one you’ve moved to.
6. Death of a loved one
There are many tax scenarios that involve the death of a loved one, depending on the relationship, inheritance, and financial strategies used. Family members usually file an estate tax return when a loved one dies. After inheritance is distributed, each person who receives money must report those inherited assets on their own tax returns.
If you inherit money, there are different tax implications. For example, if you inherit an IRA, you’ll be taxed on any distributions you take. If you inherit property, there’s what’s known as a “step-up” in the cost basis to the fair market value of the property at the time of your loved one’s death. This can help you avoid gains on the property that might have otherwise meant additional taxes.
The IRS does place a tax on estates that exceed that estate tax exemption. However, since that tax exemption is in the millions, there are very few estates that have to pay that tax. Check on state requirements because some states do charge an inheritance tax.
If you’re like many Americans, you probably created a retirement account some years back which you’ve been contributing to for years.
When you start taking retirement account disbursements, you’ll need to think about the taxes on that money. At the same time, you’re no longer earning the income that upped your tax burden, so taxation on disbursements may be nominal.
Just know that if you start taking Social Security benefits, some of that money is also taxable. As such, plan your budget carefully so you take small disbursements that provide for the cost of living during retirement.
8. Natural disaster
One of the worst events you can face in life is a natural disaster like a hurricane, tornado, flood, or earthquake. In these cases, the IRS offers you relief from your tax burden in a few ways.
First, if you live in an area that’s been designated by the Federal government as a major disaster area, you can choose to claim disaster-related losses on your federal income tax return or your previous return to get immediate money. You may also decide to wait and claim the loss on the current year’s taxes and potentially get more money.
You can get additional financial aid from the IRS and others if you are current on your federal tax returns. You’ll need to determine the amount of loss by taking your adjusted basis in a property before the natural disaster and then calculate how much the fair market value decreased after the disaster.
From there, take the smaller of those two amounts and deduct insurance or any other reimbursement.
Like all the life events on this list, it’s best to check with a tax professional.
Published by Debt.com, LLC