Getting your tax right is really important – not only will you face financial penalties if you get it wrong, but you could also be missing out on credits and deductibles that could actually benefit you.
Major life events can have an impact on your tax liability, and the more prepared you are the less likely you are to miss something important, especially when some of the events can be life-changing in different ways.
From birth to death, preparation for taxes will ensure that you don’t run into problems in the future.
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Buying a Home
The tax implications of buying a home can be complicated. You might not have to pay taxes on the full capital gain of the sale of your home, depending on certain implications.
Mortgage interest can be claimed as a deduction, but you need to itemize to be able to claim it on your return.
Other related deductions include:
- Property taxes
- PMI Premiums
- Moving expenses
- Mortgage Points Deduction
Look out for Mortgage Credits, and energy rebates if you have made certain eco-friendly updates to the property, too.
Getting Married
When you get married, you can file jointly – and this might make your tax bracket lower in the first place. It’s also much easier to file jointly – just one form. There are certain tax benefits to being married, you can also take advantage of credits and deductions with phaseouts, such as higher IRA contributions.
Getting Divorced
If you get divorced, you should start filing as single. Just make sure that dependents, credits, and deductions are properly divided between you before you file so there is no issue with misfiling.
A consideration here is whether one of you will file as Head of Household – essentially, if your spouse has not lived at the property for the last six months or more, you have paid more than half of the home costs in that time, and the home is the main residence of a dependent child, you would file as head of household.
Job Loss
A reduction in income will usually place you in a lower tax bracket, which will affect your liability – and you are likely to qualify for more credits.
Just remember that unemployment benefits are considered as income for tax purposes.
New Job
Getting a new job comes with more tax liability, some of which will come from withholding in your pay. However, you need to know whether your income will qualify you for things like Earned Income Credit, which is aimed at helping people on lower incomes.
Don’t forget that there are other things that you will have to report as well as income, such as tips and expenses like travel and car allowance. W-3Tax forms will be useful in these situations as you can keep track of everything easily.
If you are starting a new business, consider things like self-employment tax and deductibles for using your home as a business location.
Retirement
Retirement is a tricky one when it comes to taxes.
Distributions from a Traditional IRA or a 401(k) is considered as regular income from a tax perspective, and if you access your retirement account before the age of 59 ½ you will have to pay an early withdrawal penalty on top of this.
While you might want to avoid taking distributions to minimize your liability, remember that you have to take a certain distribution by the time that you are 70 ½ (Required Minimum Distributions).
Death
The estate administrator is responsible for collecting assets, paying creditors, and arranging the filing of the final tax return. This should be done both for the person and for their estate, especially as you will need to contact the IRS as part of the probate process. Wills Trusts LPA can provide valuable guidance on navigating the complexities of estate administration and tax obligations.
Assets that are distributed to heirs and other beneficiaries are not considered income for tax purposes, but any subsequent earning may be subject to taxation, unless they come from tax exempt sources.
Death taxes (estate and inheritance taxes) might be a concern for the estate administrator, but these only really apply for estates that are valued at more than $12 million.