6 Common Life Events That Change Your Taxes
Life’s most momentous occasions typically impact our finances the most, some more unexpectedly than others. Whether you’ve just purchased a new home or you’re welcoming a new member to the family, your bank account is liable to reflect these changes in a variety of ways. But how do major life events change your tax situation? Here’s what you need to know.
1. Getting married.
When it comes to matrimony and taxes, your first step is to check that your filing name matches what’s on your Social Security card. If you moved, update your address as well — you can do that as you file. You’ll also want to decide how you and your spouse will file this year. Your filing status choices are married filing jointly and married filing separately. Remember, whether you tied the knot at New Year’s Day brunch or right before the ball dropped, the IRS considers you married for the entire year, so make sure your information reflects that.
Tax Tip: If you haven’t done so already, update your Form W-4 with your employer to ensure your tax withholding is accurate now that you are married.
2. Having or adopting a child.
Changes in your sleep habits and grocery budget aside, bringing a new baby or child into your household does make quite the impact. The first thing you should consider when you welcome a new child into the family is their Social Security number. This tiny (but extremely significant) piece of data allows you to claim your child on your next tax return — including your ability to take advantage of the federal Child Tax Credit and deductions for qualified childcare expenses.
Families that adopt may receive additional credits, including (but not limited to) adoption fees, court costs, and necessary transportation expenses.
3. Buying a new home.
Just purchased a home? If so, you have new tax deductions available to you, including real estate taxes and mortgage interest. However, these deductions are only available if you itemize, so be sure to compare those deductions with the standard deduction and pick the option that saves you the most money. (Pssst — TaxAct® can help you do this when you file with us.) And don’t worry if itemizing isn’t your thing — you can still benefit from advantages likeresidential energy credits. That new water heater wasn’t cheap, but it may still end up paying for itself in savings down the line.
4. Changing jobs.
It’s a well-known fact that most taxpayers have too much money withheld from their paychecks each year — it’s why so many end up getting a big tax refund check after filing. While a large tax refund may sound like a win for some, many of us would prefer to have that money in our pockets throughout the year rather than wait for Uncle Sam to hand it back. If you’ve recently changed jobs, this is your chance to adjust your W-4 and put yourself in control of your tax scenario for the next time you file. Remember, withholding more increases your refund but leaves you with a smaller paycheck throughout the year. Withholding less reduces your refund, but it means you have access to those funds as you earn them.
Tax Tip: Try our W-4 Calculator1 to adjust your Form W-4 the way you want — whether that’s more tax refund money or more money in your paychecks throughout the year, we’ll help you fill out a new Form W-4 according to your goals.
5. The loss of a spouse.
It’s a question no one wants to have to ask, but it’s often an unfortunate necessity: What happens with my taxes when my spouse dies? First, if you qualify as a widow or widower, you may claim this filing status for up to two tax years following the death of your partner (though it is not allowed in the year of their death). The standard deduction for qualifying widows and widowers is currently the same as married filing jointly.
Tax Tip: If you happen to remarry within the year of your spouse’s death, you may not claim the “married filing jointly” status with your deceased spouse.
6. Getting a divorce.
Parting ways isn’t always easy, so understanding the tax implications of divorce is especially important for both parties involved. If your marital status by midnight of Dec. 31 is single, then you simply file separately. Even if you’ve been filing jointly for years, this change makes it official in the eyes of the IRS that you are no longer a unit. As always, your tax software will help you determine the best course of action regarding choosing your filing status following a divorce.
The bottom line
Regardless of the life change(s) you’ve had recently — or perhaps one you’re considering in the near future — it’s advantageous to keep potential tax implications of these events in mind. Life is full of events, both surprising and carefully planned, and knowing how to put those changes to work for you come tax time can make all the difference in the world for your financial future.
Article provided by TaxAct
This article is for informational purposes only and not legal or financial advice.
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1W-4 Calculator (Refund Booster) may not work for everyone or in all circumstances and by itself doesn’t constitute legal or tax advice. Your personal tax situation may vary.