Did you know that big life changes can have big tax implications? If you got married, had a baby, went through a divorce, picked up a side gig or were widowed, there may be important tax consequences to your return. Here’s a look at what to keep track of throughout the year:
Love is a wonderful thing, even according to Uncle Sam. For those who tied the knot last year (right up until December 31), there may be substantial benefits for your taxes.
In general, many couples get a tax break for being married.This life change will allow you to file jointly which can qualify you for deductions and credits that you would not qualify for if you file separately.
For starters, you’ll both get to take the personal exemption — a $4,050 benefit — which reduces your taxable income by that amount if you file jointly. You will also be able to combine incomes in order to boost contributions to an IRA or charitable donations.
(Note: Some taxpayers, particularly high-income couples, could be subject to a marriage penalty, meaning that they pay more in taxes than if they were each single.)
Be sure to contact the Social Security Administration as well as the IRS so that their records match, and make sure you and your spouse also change your W-4 withholding at work from single to married.
Birth of a Baby
What a beautiful life change! That little bundle of joy also has tax benefits. If you had a child last year, you qualify for a dependent exemption of $4,050, even if you just welcomed your baby on December 31.
There are other benefits as well, such as the Child Tax Credit worth $1,000 for each child, the Child and Dependent Care Credit worth up to $3,000 for one dependent and $6,000 for two or more (if both parents are working) in addition to the Earned Income Tax Credit. That could mean cash back of up to $6,269 for taxpayers with three or more children if you earn low-to-moderate income.
Again, be sure sure to have your child’s new Social Security number for your tax forms. You can’t claim your new dependent without it!
Hashing out a split can get complicated. If you got divorced during the year — even on December 31 — you aren’t able to file as married for the tax year. The IRS will view you as single for that entire year because of your marital status at the end of the year.
Then there’s the question of who is eligible to claim the dependents, if there are any. That has important ramifications because of all of those associated credits and deductions that go along with the kids.
The liquidation of assets may create other complicating factors that could affect your return. For example, if the family home is valuable, the tax bill could be high for the spouse who takes the house. There are also disparities in the tax treatment of the assets in a 401(k) plan vs. other accounts — not to mention the tax implications of any spousal or child support payments. (Generally, alimony is taxable by the recipient and deductible by the payer.)
If you’ve changed your name, be sure to reconcile that as well with the Social Security Administration.
For those who got in on Airbnb or Uber and earned some money from the sharing economy you will receive 1099-MISC or a 1099-K, which should be mailed to you by January 31, and you must report that income on your tax return.
Of course, the expenses you incur as a result of your side job are also deductible from what you’ve earned but only if they are necessary for the business.
For example, if you use your car you can deduct your mileage and upkeep, or if you have a home office you may be able to deduct a portion of the rent or mortgage interest and utilities as well as a computer or other costs.
Throughout the year be sure to keep a careful record of those work-related expenses in order to account for them at tax time.
There is a little leeway for those who experienced a significant loss last year. In the year you are widowed you are able to file using the same married status you have been using and get the same tax breaks that married couples do. This is the one exception to the rule that your marriage status at the end of the year dictates your filing status.
When a spouse passes away, any inheritance or property is passed to a surviving spouse without needing to pay any estate tax.
If you are anticipating to collect a tax refund in place of your deceased spouse you should complete and file a Statement of Person Claiming Refund Due a Deceased Taxpayer (Form 1310). Filing the form will help to avoid possible delays in receiving your refund.
Most other life changes, including your filing status and Social Security benefits, will occur after the year of death. For the two years that follow, you can file as a qualifying widower as long as you have a dependent, which means the tax rates will still be lower than filing single.
Do you have questions about big life changes? Email us and we’ll help you know what to do and how this will affect you!