Life Events and Your Taxes
Weddings, the birth of a child, the sale of a home and other big events can change your life in large and sometimes unexpected ways. And, sometimes a change in your taxes can be one of them. Make sure you take these into account whenever possible so that you can make the decisions that benefit your family most and that will cause the lowest tax burden possible.
Ringing Wedding Bells
One of the first decisions a new couple has to make together is whether to file jointly or separately. In states that have community property laws or in families that take the Earned Income Credit, filing jointly will almost definitely be the default decision. Others may find that filing separately can save on their tax bill if their joint income pushes them up into a higher tax bracket. If either party has defaulted student loans, funds to pay them can be taken out of each year's tax refund. These are good things to discuss in advance so no one gets an unpleasant surprise.
Going Your Separate Ways
In the unfortunate event of a divorce, there will also be many tax decisions to consider. You and your former spouse will need to figure out which of you will be able to claim the children as dependents. If the divorce involves child support or alimony, these payments should be discussed with a tax professional. And, formerly married people whose exes have had tax issues in the past should find out whether they qualify for innocent spouse relief.
Starting a New Business
Even if you start a sole proprietor service business, your tax situation will be different -- and more complicated -- than it was when you drew a paycheck from someone else. Make sure you set aside money for payroll taxes; you're now responsible for both the employer and employee share. If you expect to owe over $1000 in taxes, you'll need to pay quarterly or face heavy penalties.
And, things just get more complicated if you choose to form a corporation or if your business has employees. There are more forms to file and records to keep, but, you may be able to take advantage of tax breaks not available to other business entities. You can probably deduct a portion of your start-up expenses, as well as ongoing expenses like office space.
Having a Child
While it doesn't offset the cost of a child for the whole year, the birth of a child results in a nice tax break. You can take the deduction for the whole year even if your baby is born at 11:59 on New Year's Eve. Make sure you get your child a Social Security number right away to ensure that your tax refund is processed promptly and you don't get hit with a fine for delaying.
The Death of a Loved One
If you lose a spouse, you will need to address the event when you file your taxes. You can file a joint return the year your spouse dies even if they passed away early in the year. If your spouse had an IRA and you are the designated beneficiary, that IRA needs to be rolled over so that it becomes yours.
While you may no longer have a job to go to every day, you will still need to file taxes if you have any earned income. You will probably have distributions from retirement accounts, which will likely count toward taxable income. And, if you are collecting Social Security, some of that money may be taxable if you earn more than a thresholds for your tax rate.
Medical bills are unpleasant. But, some may be tax deductible. If you have costs for ongoing care, you may also be able to get a break on your taxes. The rules can be complicated, but a tax professional can help.
Life has a lot of ups and downs. By knowing what to expect when it comes to tax time, you can be prepared and make the decisions that work best for you.