Even if your tax rate never changes, your taxes will never remain the same. Many life events can affect your taxes, not to mention legislative changes that can raise or reduce your tax bill. The following are 10 events in your life that can have a big impact on how much you owe in taxes.
1. Getting Married
Getting married can result in significant changes to your taxes — usually for the better. You will need to change your tax filing status when you get married, and you can claim a new tax exemption. You can also adjust your payroll withholding with your employer.
2. Getting Divorced
There are several ways in which divorce can affect your taxes. In addition to losing the tax exemption and filing status that comes with marriage, alimony and child support may also be involved. If you have children, only one spouse can claim the children as dependents — usually the custodial parent. If you have joint custody, make sure you and your former spouse have an agreement when it comes to claiming your dependents.
3. Having Children
Having a child likely means a lower tax bill. Gaining a dependent means you can qualify for a larger Earned Income Credit along with the Child and Dependent Care Credit, the Child Tax Credit, tax deductions, and potentially the Adoption Tax Credit.
4. Paying for College
Getting a degree doesn’t just increase your earnings potential, it can also reduce your tax bill while you’re still in school. Two important education tax credits, the American Opportunity and Lifetime Learning Credits, can result in a large refund. You can also take deductions for tuition and student loan interest. Some forms of income you can receive as a student, such as educational assistance and scholarships, are tax-free. If you contributed to a college savings plan, qualified distributions for college are not taxed.
5. Buying a House
Homeowners enjoy a range of tax benefits. The interest you pay on your mortgage is tax deductible if you itemize your deduction. You may also qualify for other deductions like a home office and energy-efficient home improvements.
6. Getting a Job
Having a job comes with numerous tax benefits. As a worker, you may qualify for the Earned Income Credit. Depending on your field, you can qualify to deduct certain work-related expenses if you itemize your taxes. Employees can also qualify for tax benefits in the form of retirement accounts. Getting a new job comes with its own unique perks if you had to relocate at least 50 miles, in which case you can deduct your moving expenses.
You may or may not be taxed on your income once you retire. Social Security income is only taxed if you receive income from another source and you have income exceeding a certain threshold. Retirement plan income can be taxed, depending on your situation.
8. Taking Care of Elderly Parents
As the Baby Boomer population ages, many adult children are finding themselves the caregivers for their elderly parents. Adult children can claim parents as dependents if the parents’ gross income is below a certain threshold and the child provides at least half of the parents’ support. Even a parent’s medical expenses can be deductible if they exceed 10 percent of your adjusted gross income.
9. Buying Health Insurance
If you purchase health coverage through the Marketplace, you must report changes that can affect your eligibility for the Premium Tax Credit, such as a change in household size, divorce or marriage, or starting a job with health insurance benefits. Failing to maintain health coverage can result in a tax penalty as well.
10. Death of a Spouse
The year a spouse dies, a surviving spouse can file as married filing jointly or separately. For up to two years afterward, a surviving spouse can also file as a qualifying widow or widower if there are dependent children or stepchildren. After that point, a surviving spouse is a single filer or head of household with tax ramifications. In most cases, the deceased spouse’s assets can pass to the surviving spouse without taxation, but taxes must be paid on the deceased spouse’s retirement account distributions.
If you’ve experienced a life change, use the VTax mobile app and learn what you can expect when it’s time to file.
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