A recent survey revealed that 56% of Americans feel they pay more than their fair share in taxes. This sentiment is particularly strong among Republicans, with 63% expressing dissatisfaction, compared to 50% of Democrats.
These life events and financial moves can lead to tax benefits and unexpected tax bills. Understanding how your tax bracket changes and which tax credits or deductions you qualify for can make a big difference at tax time. If you’re facing any major life changes, read on to learn how they can affect your tax situation and how to make the most of it.
Getting Married
You have to know the tax consequences of marriage because it is a life-changing event that comes close to transforming your personal life and finances.
- Tax Benefits of Filing Jointly:
The best part of getting married is that you fall under the same tax bracket, which automatically makes it a win-win situation. It reduces your taxable income because the earned income tax credit (EITC) or the child tax credit is increased, and you’re filing jointly with someone who might be pulling less income than you are.
For joint filers, the amount of taxes is bigger due to higher tax deductions and better rates, which makes the amount of owed taxes overall less.
- Adjusting Withholdings Post-Marriage:
After marriage, adjusting your tax withholding to reflect your new filing status is essential. This saves you the potential of having to pay more taxes on your earnings or, at the other extreme, getting a larger tax refund than expected when filing your taxes.
- Impact on Tax Brackets:
Marriage also affects tax slabs to an extent, which we will later see in more detail while discussing the tax benefits of marriage. Joint filing is often advantageous because people get a lower tax rate for a combined income. If you and your spouse have substantial earnings, a joint filing can put you into a higher tax tier, and you owe more taxes. If you want to maximize your tax benefits, seek the advice of tax professionals about your filing status.
Growing Your Family
When you grow your family, there are several tax credits and strategies to help ease the financial burden.
- Tax Credits for Dependents:
You can use dependents tax credits when you adopt a child or have a new child through birth. The larger savings are achievable when using the Child Tax Credit, provided your income falls within the credit range. This credit works in the same form as subtracting actual money from your tax debt or adding it to your tax refund.
- Child Tax Credit and Earned Income Tax Credit:
The Child Tax Credit is nonetheless one of the ways how people can save. You can get more help if you need to take charge of the Earned Income Tax Credit (EITC). This tax credit targets low to moderate-income families and will decrease the tax you pay to zero, while some get a refund.
- Educational Savings Plans for Children:
Planning for your child’s future education is also essential as your family grows. Setting up educational savings plans such as a 529 plan offers tax deductions for contributions, making saving for your child’s college years easier while taking advantage of tax savings. This long-term strategy helps you save money while reducing your taxable income.
By understanding the tax implications of these life events, you can make informed financial moves to ensure your family’s prosperous and tax-efficient growth.
Buying a Home
Buying a home is a significant life event that affects your taxes in several ways. Understanding these tax implications can help you maximize your tax return and minimize potential liabilities.
- Mortgage Interest Deductions:
As a homeowner, you can offset your taxable income through expenditures such as mortgage interest. It can lower your total federally paid individual tax amount, which is a benefit that can be felt in the early years of a mortgage contract where interest charges take the most. This is especially relevant in the context of real estate application development, which can help streamline the management of such financial aspects. That is good tax advice if one wants to minimize the tax they pay at the end of the financial year.
- Property Tax Deductions:
Another tax deductible expense is property taxes. Homeowners can deduct state and local property tax from their federal tax filing. This can add up, potentially leading to a larger refund or a smaller tax due.
- Capital Gains Exclusion on Home Sales:
If you sell your home, there is an exclusion based on capital gains if you have lived there for several years. Even if you do not sell your home, you can exclude up to $250,000 ($500,000 for married couples) from the gain from your taxable income, thus eradicating any tax implications.
These tax benefits, including mortgage interest and property tax deductions, can significantly impact your tax return. When buying a home, consult tax advice for personalized insights based on your situation.
Selling a Home
Selling a home can have significant tax consequences, especially if the sale results in a profit. The first and closest thing that a person will most surely think of is the capital gains tax, which is a tax on the gain you obtained from selling the property. But there are such exceptional cases. If you have lived in the home for at least two of the last five years, you may be able to exclude as much as $250,000 of the gain (or $500,000 if you are married and filing jointly).
- Capital Gains and Exclusions:
Any gain from the sale that exceeds this exclusion is subject to capital gains tax, which is calculated based on the difference between the selling price and your adjusted basis (the price you paid for the home, plus improvements). It is also essential to monitor the home improvements every year because claimed improvements raise your basis and thus lower your taxable gain.
- Impact of Home Improvements on Taxes:
Common changes around the home, such as putting a new roof or even the kitchen, may be claimed back from tax, provided that the changes are for enhancement of the property. When you dispose of the property, these can reduce your taxable capital gain, lowering the tax you must pay on your sale. Any receipts of proofs of improvement should also be kept to maximize these deductions. In addition, homeowners can claim a tax credit for eligible home energy efficiency upgrades by using IRS form 5695.
Accepting a Promotion or Raise
Salary increases or promotions can be very joyful, but it comes with the implication of taxes. It is important to know how these live-altering events influence your taxes the same way they give you untimely shocks when the master is around.
- Changes in Tax Brackets:
One of the most immediate impacts of a raise is the potential shift to a higher tax bracket. With increased income, you might pay a larger percentage of taxes, especially if your raise pushes you into a new bracket. This joint life event affects your taxes, and it’s important to be prepared for a higher tax liability at the end of the year.
- Adjusting Withholdings:
After a salary boost, you may need to adjust your income tax withholding. This helps ensure enough is removed from your paycheck to cover the increased tax liability. If you adjust your withholdings, you might avoid a larger tax due or a smaller refund when filing your tax return.
- Retirement Account Contributions:
Contributing to retirement accounts like a 401(k) can reduce your taxable income. Suppose you’re now in a higher tax bracket. In that case, this is an excellent time to consider making larger contributions to manage your tax liability and lower your tax bill for the current 2024 tax year.
Planning for Retirement
Understanding the tax implications of retirement account withdrawals is crucial when planning for retirement. Withdrawals from tax-deferred accounts like a 401(k) or IRA are generally taxed as ordinary income, potentially pushing you into a higher tax bracket. This is one of the everyday life events that can significantly affect your taxes, especially if you take large withdrawals in a single year.
To minimize taxes, consider strategies like:
- Spreading out withdrawals:
Taking smaller withdrawals over time helps avoid a larger tax burden in any given year.
- Roth conversions:
Converting some of your tax-deferred accounts into Roth accounts can reduce taxes later since Roth withdrawals are tax-free.
- Tax-free income sources:
Consider tax-exempt income sources, such as certain municipal bonds, to reduce taxable income.
These life-changing events can impact your taxes and help ensure a more stable retirement. Tax preparation is key to managing your tax burden effectively and avoiding unnecessary surprises.
Receiving an Inheritance
Receiving an inheritance can bring unexpected financial changes. However, it’s important to understand the tax implications that come with it, especially when it involves assets like IRAs or property.
- General Tax Treatment of Inheritances:
Inheritances are generally not subject to income tax, so if you inherit money or assets, you typically won’t pay taxes on the amount received. However, there are certain tax documents you need to keep for future reference.
- Inherited IRAs or Property:
The tax treatment of inherited IRAs varies. If you inherit an IRA, you may have to pay income tax on distributions, depending on your relationship with the deceased. Likewise, inherited property may be subject to state and local tax if you sell it, and changes in tax laws could impact its value.
- Understanding the “Step-Up” Basis:
One of the most important tax tips when inheriting property is the “step-up” basis. This means that the value of an inherited asset is adjusted to its market value at the time of death.
If you sell the asset, the capital gains tax is based on this stepped-up value, which can help lower your tax burden. This can make a big difference in life changing events where you inherit property, especially when considering how the change in tax situation impacts your overall taxes.
Divorce and Separation
Your tax situation can change significantly during a divorce or separation. Here are key tax considerations:
- Changes in Filing Status Post-Divorce:
After a divorce, your filing status changes, impacting your tax rate and eligibility for certain tax benefits. If you were previously filing jointly, you may now need to file as “Single” or “Head of Household” (if you qualify). This change in status could mean a larger refund or smaller tax due, depending on your situation.
- Impact on Deductions and Credits:
Divorce often affects your eligibility for deductions and credits. For example, certain life-changing events, like child custody arrangements, can influence your ability to claim credits such as the Additional Child Tax Credit or the Adoption Tax Credit.
- Child Custody Considerations for Tax Purposes:
In cases of child custody, only one parent can claim the child as a dependent, which can impact deductions and credits. This is one of the common life events that affects taxes, especially when determining which parent can claim the Child Tax Credit. A TurboTax tax expert or CPA can help navigate these complexities if unsure.
Dealing with the Death of a Loved One
When a loved one passes away, the tax implications can be overwhelming. Understanding how taxes affect their estate and the responsibilities of those left behind is important.
- Filing Final Tax Returns:
You must file a final tax return for the deceased, covering the period from the start of the year to the date of death. This is crucial in ensuring that all taxes are paid. A tax expert or CPA can help determine any deductions or credits based on their tax situation.
- Estate Tax Considerations:
Estate taxes may apply if the estate exceeds a certain value. Estate tax laws change over time, and staying updated on current rates is essential. In some cases, tax due from another tax year could arise if the estate has real estate taxes or other assets involved.
- Responsibilities of Heirs:
Heirs are responsible for reporting inherited assets, such as property or investments, on their tax forms. These assets may have a tax impact, and life events could change your tax situation. It’s essential to consult with one of our tax professionals for guidance on filing a tax return and managing any potential tax.
Changing Employment or Career Paths
Changing jobs or career paths can have several tax implications that you should be aware of. The first consideration is how it impacts your tax forms and withholding. A change in income or employment status may require adjusting your tax due from another tax based on your new salary. Be sure to update your withholding with your employer to avoid underpayment at the end of the year.
- Moving Expenses and Their Deductibility:
If your job change requires a move, you may wonder if you can deduct moving expenses. While moving expenses were once deductible, recent tax laws have limited this benefit primarily to active military members. However, if you incur tax from another source due to relocation, consulting one of our tax professionals can help clarify the details based on your situation.
- Impact on Retirement Plan Contributions:
Job changes often mean a shift in retirement plan contributions. Whether moving to a new employer’s 401(k) or rolling over your existing funds, reviewing how this could change your tax situation is important. This could affect your personalized tax return and the tax implications for your next filing.
Tax planning around job changes requires awareness, as major events like these can significantly impact your taxes
Starting a Business or Freelance Work
Starting a business or working freelance can significantly change your tax situation. As a self-employed individual, you’ll face self-employment taxes typically higher than standard employee taxes. These taxes cover both your Social Security and Medicare contributions.
- Self-Employment Taxes and Deductions:
Self-employed workers can benefit from a range of tax deductions to lower their taxable income. Business-related expenses like office supplies, software, and even a home office can be deducted. This can lead to a smaller tax due from another if you strategically track your expenses.
- Estimated Tax Payments for Business Income:
Unlike salaried employees, freelancers and business owners must make estimated yearly tax payments. Failing to do so could result in tax audit risks or penalties. A tax expert or CPA can help ensure you’re on track with these payments.
- Business Expenses That Can Reduce Taxable Income:
Certain business expenses, like travel or marketing costs, can help reduce your taxable income. These deductions will directly impact your taxes, potentially lowering the tax due from another tax year, especially when factoring in yearly changes to your tax situation.
Major Medical Expenses or Health Changes
When you experience major medical expenses or health changes, it can significantly impact your tax liability. Here’s how:
- Deductibility of Medical Expenses:
Medical expenses can be tax deductible, but only if they exceed a certain percentage of your taxable income. You can deduct qualifying medical expenses of more than 7.5% of your adjusted gross income (AGI) for the current tax year. This includes out-of-pocket costs for procedures, medications, and treatments.
- Health Savings Accounts (HSAs) and Their Benefits:
An HSA allows you to set aside pre-tax money for medical expenses. Contributions are tax-deductible, and withdrawals for qualified medical expenses are tax-free. If you’re in a high-deductible health plan, using an HSA can help lower your tax bill and provide tax savings over time.
- Tax Implications of Long-Term Care Insurance:
Premiums for long-term care insurance may also be tax deductible depending on your age and the amount of coverage. This can help reduce your taxable income and provide significant tax benefits, especially if you anticipate needing long-term care.
Education-Related Life Events
Life events related to education can make considerable differences on your tax return and provide you with tax benefits and possible deductions to help lessen your tax burden. Here are some of those dependencies:
- Tax Credits for Education Expenses:
If you’re paying for higher education, you might be able to claim the Lifetime Learning Credit, which gives a tax credit for qualified education expenses. This has the potential to directly lower your tax bill, particularly if you’re engaging in continuing education or training.
- Student Loan Interest Deductions:
Do you have student loans you are paying off? You could deduct as much as $2,500 in student loan interest on your tax return. This reduces your taxable income, and taxable income correlates with your tax rate.
- 529 Plans and Their Tax Advantages:
529 contributions grow without being taxed, and withdrawals for qualified educational expenses are also tax-deductible. As noted earlier, it’s a great way to save for education with tax benefits.
Tax advice from a tax professional can help you navigate these everyday life events and maximize your potential tax breaks. Whether it’s for the current 2024 tax year or the past two tax years, understanding the tax consequences of these life changes can help you plan and reduce your overall tax liability.
Utilizing Tax Professionals or Advisors
Consulting a tax advisor can provide crucial guidance when experiencing significant life events—such as marriage, purchasing a home, or receiving an inheritance. Tax professionals, especially Certified Public Accountants (CPAs), offer tailored strategies to navigate the tax implications of these changes, potentially minimizing your tax liabilities.
- Benefits of Consulting a Tax Advisor:
A tax professional can help you understand how life events affect your tax situation and suggest strategies to optimize deductions, credits, and long-term financial planning. Whether preparing for a tax return or advising on retirement savings, a CPA is essential in ensuring tax efficiency.
- Understanding the Role of CPAs in Financial Planning:
CPAs provide more than just tax services—they’re integral to financial planning. They can help align your financial goals with tax strategies, offering proactive advice on how to manage investments, savings, and business decisions in ways that will benefit you long-term.
- How to Choose the Right Tax Professional:
When choosing a tax advisor, look for someone with relevant experience, certifications, and a reputation for thoroughness. Ensure they understand your unique financial circumstances and can provide personalized advice to guide you through any life changes.
Did I Cover All the Key Points?
I’d love to hear your feedback!
Which aspects of the tax implications related to life events and financial decisions stood out?
Are there particular situations or strategies that will immediately impact your financial planning? Or do you see new opportunities or ideas that could influence your tax strategy in the future?
Whether you’re navigating life events or exploring ways to optimize your financial moves, share your experiences and thoughts in the comments below!