Life Changes Which Affect Your Taxes
Buying a home, having a baby, switching jobs, getting divorced, retiring and other life changes can affect your tax situation. Here’s a look at these major events and what each could mean for your taxes.
Having a child
Expanding your family can greatly alter your taxes. You may now qualify for more credits, including the Child Tax Credit, Child and Dependent Care Credit, or education credits later on. If you adopted a child, you may also qualify for the Adoption Tax Credit.
Your filing status might also change. If you are a single parent, see if you qualify to file as Head of Household. It could mean more tax benefits than if you are filing as single.
Congrats! If you recently got married, it is an exciting time in your life, and it can affect your taxes in some significant ways. For example, you must choose to file either Married Filing Jointly or Married Filing Separately.
If you recently changed your name due to marriage, you must change your name on all legal documentation starting with your Social Security card. Don’t forget to update your name with your bank, job, insurance, and Driver’s License. This can affect your taxes, so make sure you update your name prior to filing. It can be a lengthy process, so get started ASAP.
Divorcing or separating
A lot of things change as a result of divorce, including your tax situation. You might need to change your address, your name or your withholdings. Additionally, you’ll need to know how to treat alimony, child support, property settlements and more on your tax return.
Child support is entirely tax neutral, so those payments — whether you pay them or receive them — do not affect your taxes. Custody, on the other hand, can impact your situation. Only one parent can claim a child as a dependent on their taxes (when you are not filing jointly). This will have a direct effect on which tax breaks you qualify for. The Child Tax Credit, Child and Dependent Care, and the EITC are some of the most important credits available to parents with qualifying dependents.
If your divorce was settled after January 1, 2019, you should not deduct alimony you paid to your former spouse, and you don’t need to report it as taxable income if you are the one receiving alimony.
Getting a new job
When you start a new job, you must fill out Form W-4. Check your withholdings to make sure your new company is withholding the correct amount from your paycheck for taxes. You should check your withholdings whenever a new life event occurs, and when the tax laws change – not just when you get a new job.
If you pick up a second job or start earning income through self-employment, your income will likely change. This affects how much you are expected to pay in income tax. It can also impact the amount you get for certain income-dependent tax credits. For example, the Earned Income Tax Credit is calculated based on your AGI, the number of qualifying dependents you claim, and your filing status. A change in your income could result in a larger or smaller credit.
If you are self-employed (either as a second job or your primary source of income), you may get to write off business-related expenses like a home office and mileage, as long as the expenses are ordinary and necessary for your job.
Losing your job
When you lose your job, you may qualify for unemployment benefits. Those benefits are taxable, and you will still need to file a tax return if you meet the minimum income requirements for your filing status. At tax time, you will receive Form 1099-G. This is the form you will use to report your benefits.
There is a lot to know about Social Security, IRAs, and other retirement plans. You may be eligible for a credit for making contributions to your retirement savings.
If you need to make an early withdrawal from your retirement account, you might owe a tax penalty.
Buying a new home
Buying a new home is a big financial step. If this is your first home, there are several tax breaks just for homeowners that you’ll want to consider. Mortgage interest, property tax, state and local tax, and certain home improvements may all be claimed on your tax return.
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