Several life-changing events can affect how much you owe the IRS for taxes. These may include buying a home, switching jobs, getting divorced, having a baby, and more.
Let’s have a look at these significant events and how each can impact your tax return:
Buying or Selling a Home
There are several deductions you can maximize when buying a home. These include paid points, mortgage interest, and real estate taxes. If you plan to sell, filing jointly allows you to avoid taxes on gains of up to $500,000.
Getting Married
Getting married often results in a welcoming tax break. When you get married, you can file jointly, meaning you can often take advantage of lower tax rates. Additionally, filing a joint return allows you to maximize more credits and deductions.
Having a Baby
Having a baby can significantly lower your tax liability. A baby grants you an additional child tax credit and many more potential tax benefits such as the Child Tax Credit, Child and Dependent Care Credit, Earned Income Tax Credit, and education credits. If you adopted a child, you may also qualify for Adoption Tax Credit.
Getting Divorced
Several things change after a divorce, including your tax situation. Specifically, your filing status changes after a divorce.
If you were previously filing jointly, you will now file as single or, if eligible, as head of household. This change can impact your tax brackets, deductions, and credits. Other notable changes include:
Child Support and Custody
Child support payments cannot be deducted from taxes for the paying spouse and will not be considered as income for the receiving spouse. On the other hand, custody can impact your taxes. For example, a divorce settlement might determine who claims the children as dependents for tax purposes.
The custodial parent typically claims the child as a dependent, enabling them to claim related tax benefits like the Child Tax Credit, Earned Income Tax Credit, and other credits.
Alimony
Alimony may be deductible for the payer and taxable income for the recipient if specific IRS requirements are met. If your divorce was settled after January 1, 2019, you should deduct the alimony you paid to your former spouse.
If you are the one receiving it, you do not have to report it as taxable income.
Receiving a Work Promotion
Generally, a promotion often means a raise and higher salary or additional income from bonuses, which can push you into a higher tax bracket. This means you may owe more in federal and state income taxes due to an increase in income from a promotion.
If your promotion includes bonuses, commissions, or stock options, these are usually taxed as ordinary income, and taxes may be withheld differently than your regular salary.
Becoming Self-Employed or a Freelancer
The law requires self-employed individuals to pay Social Security and Medicare self-employment taxes. When you are an employee, half of these taxes are paid by your employer.
However, as a self-employed person, you will pay both the employer and employee portions (15.3%). Since taxes are not withheld from your income as they are with traditional employment, you might need to make estimated tax payments to the IRS each quarter.
On the brighter side, as a self-employed individual, you can deduct business expenses related to your work. These include office supplies, equipment, travel expenses, a portion of home office expenses (if you work from home), professional fees, and more.
Losing a Job (Becoming Unemployed)
With less income if you lost your job and are unemployed, you will likely find yourself in a lower tax bracket. Additionally, being unemployed may make you eligible for more tax deductions and credits.
However, keep in mind that the IRS will tax your unemployment benefits. Unemployment payments usually count as income. Often, you can ask for taxes to be withheld from your unemployment, so you will not owe the IRS when you file your return.
Paying for Education
The costs associated with school can yield several tax benefits. These include the American Opportunity Credit, capped at $2,500, and the Lifetime Learning Credit, capped at $2,000.
Additionally, if you have a student loan, you can deduct up to $2,500 of your loan interest on your taxes. The cost related to obtaining professional certifications can also be deducted from your taxes.
Receiving an Inheritance
A huge chunk of money received from an inheritance is tax-free. However, if you inherit an IRA, expect to pay the IRS taxes on any received distributions.
If you inherit a property, take note of the “step-up” in your “cost-basis” to its current value when the original owner passed. Any subsequent increase in property value may incur taxable gains.
Retiring
There are several tax issues you should be aware of when transitioning to retirement. Here are a few retirement situations that affect taxes:
- Early Retirement: You will be charged an early withdrawal penalty if you retire early and take money from your retirement investments before you are 59 1/2.
- Taking Distributions: Your tax bill changes once you begin taking distributions from your retirement. Generally, the IRS considers 401(k) and traditional IRA distributions as regular income, meaning you will pay taxes when you withdraw.
- Earnings from Roth Accounts: Any earning from your Roth account is not taxed when withdrawn, provided you are 59 1/2 years old and wait five years after making the initial Roth contribution.
Regardless of the major life change you are experiencing, there is also a likely change to your tax situation and what you’ll owe the IRS. If you are unsure how your new milestone will affect your taxes, consult an experienced tax professional.
Need more help? You can start online by answering 6 simple questions. You can also call us at 866-568-4593.
6 Simple Questions. Free Evaluation.
Join our Newsletter
Enter your email address to join our free newsletter. Get all the latest news and updates.