10 Life Events That May Spur The Need for a New Tax Preparer
Change is the only constant in life, that’s for sure. Your life events, plus tax reform changes can be cause for either increasing or decreasing your taxes. Here are a few life events that can significantly change your tax outcome each year.
1 – Branching out from your parents’ financial help.
If you are a young adult, it’s possible you were your parents’ dependent until the age of 24 or older! If you have recently advanced into the real world and are making an income, guess what… It’s tax time! You’ll now have to prepare your own tax return or hire a tax professional to do it for you.
2 – Getting a higher degree.
The Tax Cuts and Jobs Act (TCJA) modifies and eliminates some of the benefits for those paying for a higher degree, or those who are paying off student loans. However, many of the most popular tax benefits for education (like the credits and the student loan interest deduction) remain unchanged. For instance:
American Opportunity Credit (AOC)
This credit remains unchanged. This Credit is available to current students, at $2,500 per student and up to $1,000 of the credit is refundable. (It is only available for 4 tax years per student and is only available if the student has not completed the first 4 years of postsecondary education before the end of the tax year.)
Lifetime Learning Credit
This credit remains unchanged. It is a credit of up to $2,000 per tax return for qualified education expenses paid for all eligible students included on the taxpayer’s tax return. (There is no limit on the number of years the lifetime learning credit can be claimed, and the student does not have to enroll in a minimum number of hours to claim the credit.)
Student Loan Interest Deduction
This deduction remains the same. It allows taxpayers to reduce their adjusted gross income by up to $2,500 and is based on the amount of qualified student loan interest paid during the year. That’s interest paid on a loan taken out solely to pay for qualified education expenses for a qualified student. Taxpayers can claim this deduction even if they don’t itemize. (A key requirement is that the student must be the taxpayer, spouse or dependent, and enrolled at least half-time in a program leading to a degree, certificate, or other recognized credential at an eligible institution.)
Tuition and Fees Deduction
The TCJA did not extend the tuition and fees deduction, but Congress recently extended this deduction retroactively for 2017 returns. The tuition and fees deduction allows taxpayers to reduce their taxable income by up to $4,000.
3 – Buying or selling a house.
Real estate transactions have a big effect on taxes – especially after the recent tax law changes.
Standard deduction: The new law increases the standard deduction to $12,000 for single filers and $24,000 for joint filers. For many homeowners it no longer makes sense to itemize deductions.
Mortgage interest deduction: If you’re buying a new house this year, you still may reap a significant tax deduction. The mortgage interest tax deduction is a cherished tax break for homeowners. The new tax law sets the limit on deductible mortgage interest at $750,000 debt for home loans taken out after Dec. 14, 2017.
Itemized deduction cap: Starting in 2018, the maximum deduction for state and local taxes is $10,000. The cap applies to state and local income taxes, real estate taxes, and personal property taxes combined.
Historic tax credit: This credit can be used for home renovations in designated historic structures. The law offers a 20% credit when the certified historic property is placed into service over a five-year period.
4 – You add to your family.
If you had a baby or adopted a child this year, this has huge tax implications – and usually for the better. This is because an additional dependent typically brings additional tax deductions and credits, like the Child Tax Credit, for example.
5 – You get a new job.
Are you changing jobs this year? Whether you find an exciting new job opportunity in a new state or decide to switch career paths, most people are likely to change jobs at some point. Leaving and starting a new job has many implications for your tax bill. For example, take time to review and fill out a W-4 Form every time you switch jobs so you ensure you’re withholding the right amount of taxes each paycheck. (The number of “allowances” claimed on a W-4 determines how much money is withheld from your checks.)
6 – You start building a nest egg.
For most of us, a simple saving account is not enough to afford the lifestyle you desire now and in the future. Many people elect to start retirement accounts – like a 401(K), Roth IRA, or SEP – to start building that golden nest egg for retirement income. When you set up or grow a retirement account, each type of account has a different tax treatment, which can change your overall tax outcome.
7 – Starting your own business or becoming a freelancer.
Taxation of income as a small business owner changes drastically. Estimated income taxes, record keeping, business-related tax deductions, setting up an EIN, and separating business expenses from personal are just a few tax challenges presented when you become a self-employed worker.
8 – You retire.
Retirement changes your flow of income. While employed, you probably relied on employer paychecks, but now you have to tap into totally different income streams – like your Social Security and retirement accounts. This change in flow of income presents significant tax changes.
9 – Getting a major gift from a family member.
If your rich, long-lost aunt decides to shed her millions to you, it could impact your taxes in a major way. For example, you may have to pay tax on investment income, survivor’s pension benefits, and other types of income that you never received before.
10 – A loved one passes away.
Did you know that if someone passes away in your family, the executor may have to file a tax return in the deceased’s name? Depending on the amount and type of the deceased’s assets, an estate income tax return and an estate tax return may also need to be filed. After the assets of the deceased’s estate are distributed, heirs may have to report certain amounts, such as a taxable portion of an inherited IRA, as income on their individual returns.
Long story short, your life evolves and our tax specialists at Block Advisors are here with you every step of the way. Get matched with a tax advisor now.