Many factors influence your taxes, and any changes you make in those factors can change how you file and how much you pay in taxes. Almost any major life event has tax implications. Some are for the better, others not so much, but regardless of which, being aware of these implications and how to navigate them can save you from unnecessary headaches and costly tax penalties.
Having a Child
When you have a child, you could qualify for additional tax credits, such as:
- The Child Tax Credit
- The Dependent Care Credit
- The Earned Income Tax Credit (EITC)
If you adopt a child, you could also get the Adoption Tax Credit. Then, further on in your child’s life, you may qualify for education credits, such as for certain college costs or setting up a 529 Plan.
You may also have to change your filing status after adding a child to your household. If you’re a single parent, you might be able to file as Head of Household, which would offer even more significant tax advantages than filing as Single.
Remember, to access any of these benefits, your child must have a Social Security number or tax identification number.
Getting Married, Separated, or Divorced
Your filing status changes any time your marital status changes.
You must file either Married Filing Jointly or Married Filing Separately if you get married. Filing Jointly typically has greater tax benefits.
If you later separate, you might choose to change your filing status, such as from filing Jointly to Separately. If you get divorced, on the other hand, neither option applies, and you’ll have to choose either Single or Head of Household.
Another tax concern for couples who’ve divorced is how to report financial events resulting from terms of the divorce, such as settlements. Certain financial events, like paying or receiving child support or, as of January 1, 2019, alimony, are entirely tax neutral, so neither payer nor payee needs to report it.
Child custody, however, can impact your taxes greatly. Unless the split couple is still filing Jointly, only one parent can claim the child as a dependent, even if both parents share custody.
Whatever the change in marital status, remember to change all your personal identification documents to reflect any name change that occurs from it. This can affect your options for how you file and how long it can take you to file, and the hassle entailed should you not prepare ahead of time.
Obtaining or Losing a Job
Getting a Job
When starting a new job, you need to complete a W-4 form to determine how much your employer is withholding from your pay each period for taxes. It’s a good idea to check your withholdings to ensure they’re not taking out too much or too little. It’s necessary, however, to check your withholdings and change them, if necessary, anytime a new event in your life occurs, including but not limited to obtaining or losing a job.
Getting promoted at your job will likely increase your pay, subsequently increasing how much you need to pay in income taxes. Depending on how a raise in pay affects your total income, it could also send you into a higher tax bracket.
Taking on a second job or some form of self-employment will likely increase your income, which will increase your tax bill, in turn. It may require you to set aside certain portions of your income to make Estimated Tax Payments. Depending on your new income, added employment may affect how much you get in certain tax credits, for either better or worse. People who are self-employed, either full-time or part-time, may be able to write off certain business-related expenses, like mileage or a home office.
Losing a Job
Losing a job may qualify you for unemployment benefits, which are taxable. Provided you still meet the minimum income requirements, you still need to file an income tax return on those funds. If you’re married and your spouse is still working, you two may choose to change the withholdings on your spouse’s W-4 to compensate for any income loss from your loss of employment.
If you worked for most of the year and had the right amount of withholdings deducted from your pay, losing your job could qualify you for a larger refund. When you start looking for a new job, some of those job-hunting expenses could be tax-deductible.
Buying or Selling a Home
Buying a Home
Homeownership has many potential tax advantages. There are several items related to your mortgage, for example, that you can claim as deductions on your tax return, such as:
- Mortgage interest and points
- Property and other real estate taxes
- State and local taxes
You may also be able to claim certain home improvements as deductions. Buying a home to use purely as a rental or vacation rental comes with its own set of tax benefits and burdens.
Selling a Home
If you sell a home for more than its purchase price, you could incur a Capital Gain Tax on the difference.
When moving out of state, you’ll need to file a partial-year return in each state.
Only active-duty military personnel are eligible to deduct expenses for significant moves.
The implications of retiring on taxes are vast and varied and involve topics like retirement plans and Social Security too complex to summarize here. Suffice it to say, retiring will affect your taxes, for better and/or worse.
For example, if you continue making payments into your retirement even after you retire, which you can do until a certain age, you could get a tax credit on those contributions. However, if you make an early withdrawal from a retirement plan, you could incur a tax penalty (provided you don’t qualify for an exemption).
Death of a Loved One
A loved one’s death can trigger many financial events that can affect your taxes, such as an inheritance. When a loved one dies, family members typically file an estate tax return until the inheritance is distributed. Then, each person bequeathed money, or taxable assets must report that inheritance on their personal tax returns.
Fortunately, you don’t have to navigate all the tax implications of your major life events on your own. If you live in the Charlotte area, you can find a tax accountant in Charlotte to help guide you. Pick a Charlotte NC, accountant who knows the federal tax implications of certain events as well as the local and state implications within Charlotte and North Carolina.
Scott Boyar is one such CPA in Charlotte with a proven reputation for helping people in the area steer the ship of their lives through the choppy waters of tax implications. A certified personal accountant in Charlotte like Scott can help you manage your tax obligations while focusing your attention on your actual life events. For more, contact Scott Boyar online or call him at 704-527-2725.