Fluctuating taxes are one of life’s certainties. Legislative changes can reduce or increase the amount of taxes you owe, but that isn’t the only factor that can alter your tax situation. A variety of life events can impact your tax liability by altering your filing status, changing your tax bracket, or making you eligible for new deductions or credits.
When life changes arise, it’s crucial to consider their implications on your financial health. These eight real-life examples can drastically alter your tax situation:
1. Marriage or Divorce
Although few people get married for the tax benefits alone, this life event often comes with a welcome tax break. You’ll usually get lower tax rates and more deductions by filing jointly as a married couple.
On the flip side, divorce is another major life event that significantly affects your tax status. For example, the IRS classifies alimony as income for the receiving spouse. If you’re the one paying, you may qualify for certain deductions.
2. A Growing Family
If you welcome a new child or dependent to your family, it can help minimize your tax obligations. In addition to a child tax credit, having a baby can grant you various additional benefits, ranging from the Earned Income Tax Credit to education-related credits.
3. Continuing Education
Going back to school is often a wise investment because it can significantly improve career advancement opportunities. The American Opportunity Tax Credit (AOTC) and Lifetime Learning Credit (LLC) are examples of tax credits that can subsidize your education. The two credits are worth up to $2,500 and $2,000, respectively. You can also deduct the cost of obtaining certain certifications if you’re self-employed.
4. Buying or Listing a House
Numerous costs associated with purchasing a home are tax deductible, including paid points, mortgage interest, and real estate taxes. If you’re selling property, you can avoid taxes on as much as $500,000 in gains if you’re filing jointly.
5. A New Job or Promotion
Promotion may be a welcome reward, but it can push you into a higher tax bracket, requiring you to pay more taxes on your earnings. If your income has changed over the past year, you may need to adjust your W-4 withholdings. In addition, if you accept a new job in a different state, you may claim deductions associated with relocation expenses.
6. Retirement Plans
Contributions to tax-advantaged accounts, such as 401K plans or individual retirement accounts, can result in significant tax savings. The more you contribute, the better your tax status and retirement outlook. The IRS usually taxes distributions when you make withdrawals from your plan.
Most money obtained through inheritance is tax-free. However, inheriting an IRA means you’ll almost certainly pay taxes on any distributions. If you inherit property, your cost-basis (or original property value) depends on its value at the time of the decedent’s death. If the property’s value rises after that, the gains are usually taxable.
Your representative must file the last tax return on your behalf in the year of your death. Your spouse may also prepare a joint return for the year. An estate tax return may be required depending on the quantity and structure of your assets. Following the distribution of your estate’s assets, your heirs are responsible for filing future tax returns that include any inherited assets.
You can’t afford to overlook tax-saving opportunities. By considering how your financial circumstances may evolve from year to year, you can ensure you don’t miss out on any vital tax breaks. Given the complex nature of some life events, it’s a good idea to consult a tax expert for the most practical tax optimization tips.