It is often said that the only inevitable things in life are death and taxes. While that’s somewhat true, the reality is your taxes won’t always look the same. Throughout your lifetime, several key life events can cause changes to your tax status.
From getting married, to having babies and taking on a new job to retirement several key life changes prompt the need to change the way your taxes are filed.
5 Life Events that Affect Taxes
1) Change in Marital Status
When you get married you will notice that you will have to make a choice when it comes to filing your taxes. You can file as married filing jointly, or married filing separately. It doesn’t matter if you got married on January 1st, June 15th, of December 31st, the year in which you marry is the year that IRS considers you to be married for the entire year. Your tax return will reflect that.
If there is a divorce in the family your taxes will change as well. If your divorce is finalized before December 31st, you will file single for that tax year. If however, you are still in the process and the divorce decree has been fully issued you can file as “married filing separately” or “married filing jointly.”
2) Having or Adopting a Child
You need to make sure you register each child for a social security number. You’ll need that number to file your taxes. With that number, you will be able to qualify for a tax deduction for qualifying child in the home and you will most likely qualify for child tax credit as well. Once your child ages into adulthood you won’t be able to claim a child tax credit, but they may still qualify for dependent deduction.
If you have adopted a child in the last year, in addition to child dependent tax deductions and child tax credits, you may qualify for additional tax credits for adoption expenses.
Qualifying adoption credits can include:
- reasonable and necessary adoption fees,
- court costs,
- attorney fees,
- traveling expenses such as meals, lodging, airfare, car rental, etc.,
- any other fees and costs that are directly associated with the adoption process
For more information regarding allowable adoption expenses, see Topic No. 607 Adoption Credit and Adoption Assistance Programs on the IRS website.
3) Death of a Family Member
It is most certainly a difficult transition when a spouse passes away. There is so much to figure out regarding finances and estates. But, when it comes to taxes the filing changes are relatively simple. When filing the year of his or her death, you file the same as you had previously. For the two years following the death of a spouse, anyone who qualifies for widow/widower status can file the standard deduction, the same as if they were filing married filing jointly. Following that two year window, the widow/widower would file as a single person.
If you happen to remarry within the year of your spouse’s death you cannot claim “married filing jointly” as the spouse of the deceased. You’d have to file with the new spouse.
When a Child Dies
For the year that a child has passed away, you can still claim them as a dependent for that tax filing year. Following that year, you would no longer claim the child as a dependent or be eligible for child tax credit for that child. You’d still qualify for any other children in the household that you are either the parent of or legal guardian of.
4) Buying a Home
When you buy a new home you may discover new deductions that are available. These deductions include fees for mortgage insurance, home insurance, and real estate taxes. Additionally, you may qualify for tax credit for interest paid on mortgages, and tax credits for energy savings appliances, windows, or other energy efficient upgrades to your home.
5) A Change in Job Status
Whenever you change jobs there are a few things to consider with your taxes. First, a change to the amount of income you receive could change your tax liability. A significant salary increase could place you in a different tax bracket. At the same time, a loss of income could reduce your tax liability.
When starting a new job you will have to fill out a new W-4. This form tells the employer how the amount of tax that to withhold to pay into payroll taxes. When you file your return the difference of what you owed, and what was withheld, is then calculated and you either end up getting a refund or owe a bit more in taxes. Whenever you fill out a W-4, it’s a good idea to consider if you want a higher refund, or if you’d rather keep that money in your paycheck. Adjusting your W-4 withholdings allows you to maintain control of your tax payments.
Just as when you accept a new job and things can change with your taxes, the same is true if you lose a job. Loss of income can affect the amount you owe in your taxes, but it’s important to know that unemployment benefits are considered taxable by the federal government. That’s because unemployments benefits are still income and income is taxable.
Whenever life events bring change to your life there is the potential to have changes in your taxes as well. Knowing how these changes can affect your tax return filing can help you to make the best possible decision when it comes to your tax and financial future.
Of course when these changes happen, we can help you to navigate your tax return with ease.