Life Changes and the Need for A Year-Round Tax Service
You might think your job with taxes is done after you file a return, but you are wrong. Life events have a significant tax impact. From getting married and having a baby, to changing jobs and retiring, common life events can catch you off-guard if you are not prepared.
Here are common life event that may spur the need for year-round tax service:
Whether you recently have gotten married or divorced, your legal relationship status has tax implications. For example, if you recently got hitched, you must switch your state and federal status from “single” to “married”. Depending on your and your spouse’s income, this change may offer tax advantages. For example, if you and your spouse have disparate income levels, your tax bracket could potentially be lower than when you were single. Additionally, joint filers may benefit from higher phase-out thresholds for credits and deductions like the Earned Income Tax Credit, Child Tax Credit, Child and Dependent Care Tax Credit, and educational tax credits. While these credits are available to single filers as well, the phase-out thresholds are higher for joint filers, which benefits married couples with disparate income levels.
On the other side of the fence there is divorce. Divorcing means that you will now file a solo tax return, yet you need to make sure that your dependent exemptions, credits, and deductions are properly divided between you and your former partner.
If you are unmarried, divorced or legally separated, you may think that you can only file your return as single. However, if you have dependents, you may be able to file as head of household. That means you will be in a lower tax bracket and your standard deduction will increase. Here are some cases when you may need a year-round tax service:
Having a Child
First comes love, then comes marriage, then comes the baby in the baby carriage, right? Well, if your life has taken a similar journey know that after having a baby (or adopting) you have to be mindful of the tax implications.
As a new parent, you can claim your baby as a dependent and receive the Child Tax Credit if you meet specific income requirements. You might also qualify for the Earned Income Tax Credit (EITC), a credit designed to reduce the burden associated with Social Security taxes to low- to middle-income earners.
Buying a House
If you buy a house, several tax deductions like home mortgage interest and real estate taxes are at your fingertips. Your home may be a house, condominium, cooperative apartment, mobile home, houseboat, or house trailer that contains sleeping space and toilet and cooking facilities. Read this to learn how you treat items such as settlement and closing costs, real estate taxes, sales taxes, home mortgage interest, and repairs and what you can and cannot deduct on your tax return.
Changing jobs creates complexity and the need for year-round tax services as well. You need to consider withholding status, unemployment payouts, and even the tax impact of a job loss or relocation. For example, you may be able to deduct moving expenses from your overall income.
All in all, take the time to go over the instructions for the W-4 form you’re asked to fill out for your new employer. The number of “allowances” you claim determines your income tax withholding, which will impact your year-end tax situation. New eligibility (or loss of eligibility) for employee benefits such as health insurance and retirement plans can also affect your overall tax situation.
If you are settling into your golden years there are a number of tax considerations. For example, distributions from Traditional IRAs and 401(k)s are generally taxed as regular income, so you will pay taxes, while Roth IRA and Roth 401(k) distributions are tax-free. And, if you choose to tap your retirement account before age 59 ½, you may be subject to a 10 percent early withdrawal penalty.
How Can You Stay Prepared and Organized?
No matter what major life change you are experiencing, there is likely to be tax implications. If you aren’t sure how your next milestone will affect your overall financial picture, reach out to a Tax Advisor for more information. Our expertise is in year-round tax services and helping you understand how tax fits in to your overall financial picture.
Make an appointment at a Block Advisors office near you now!