Yahoo Finance 6 Life Events That Change Your Taxes
Somewhere, in a drawer, or on your phone or computer, you have photos of birthday parties, holidays, vacations, weddings and births. A wave of nostalgia probably courses through you, as you marvel at how your life has changed over the years. In fact, you could likely experience those same emotions by perusing other evidence of your life's milestones: your old tax returns.
To be clear, nobody is suggesting you do this, but it's important to remember that as your life changes, so too will how you prepare your taxes. Before the April 15 deadline hits, make sure to ask yourself: How has my life changed in the last year? These six milestones can really make an impact on your taxes.
You're newly married. One of the first decisions to make after tying the knot is whether to file your taxes jointly or separately, says Mike Campbell, a San Francisco-based tax partner at BDO USA, a business services practice headquartered in Chicago.
"For the majority of couples, filing jointly is the easiest administratively, especially if you live in a state that taxes income on a community property basis," Campbell says.
But that decision may also come with a price: potentially higher taxes. Some couples discover their tax tab is higher "because of the withholding levels on salaries," Campbell says. "While the withholding taxes paid through payroll may have been sufficient for each spouse when they were filing as single taxpayers, the combined income as a joint couple may lead to a combined higher tax bracket," he adds.
To help avoid surprises come tax time, Campbell suggests consulting your company's human resources department, and taking advantage of withholding calculators offered on the Internal Revenue Service's website.
Bonus tip: If you've changed your name, make sure to let the Social Security Administration know. That way, you will avoid a mismatch between the name on your tax return and the name associated with your Social Security number, says Keith Baker, a professor of mortgage banking at North Lake College in Irving, Texas. If you don't take this step, your tax return could get delayed until the inconsistency is resolved.
If there simply isn't time to do that, you should be fine filing jointly, provided the names on your tax forms match what appears on your Social Security cards.
You just bought a house. Hopefully your new home has an office where you can do your taxes. But whatever its comforts, your new residence will offer opportunities for deductions.
"A homeowner's interest and real estate taxes are tax-deductible," Baker says. To take advantage of these deductions, homeowners must itemize them. Note: You'll only get the maximum tax benefit if the actual cost of the interest and real estate taxes are more than the standard deduction.
Baker says most homebuyers borrow the money for most of their purchase price and pay points on the loan. "These are tax-deductible," Baker explains, adding that you can determine the interest on IRS Form 1098 when you receive it from the IRS.
You just had a baby. Claiming a newborn as a dependent is pretty exciting, even if this milestone pales in comparison to seeing your baby be born or crawl for the first time.
The payoff? Any parent who had a baby in 2014 will lower their taxable income by $3,950, Baker says. "A new parent gets a full year's exemption even if the child was born on New Year's Eve," he adds.
Just make sure your child gets a Social Security number. "Failure to notate each child or dependent on a tax return can result in a $50 fine and hold up a tax refund until this is fixed or explained," he says.
And if your baby spends time in day care, you can typically claim a child care credit of up to $1,050 each year until your child celebrates his or her 13 th birthday -- and sometimes after that, Baker says.
You started a business. First, consider going to a tax professional who can guide you through the filing process as a new business owner. One of the first steps you'll take is deducting the startup costs of your business. If it cost $50,000 or less to launch your enterprise, you're allowed to deduct up to $5,000 of your qualifying startup costs. If your startup costs were more, you're allowed to make some deductions, though they will be considerably less.
Down the road, once your business is up and running, you will be able to make separate deductions for standard business expenses, including everything from copy paper to computers.
But be careful if you've sold your business. This can have a huge impact on your taxes, says Jonathan Barsade, a former tax attorney and CEO of Exactor, a sales tax compliance solutions company. He says he often comes across people who have sold their business and spend the money on everything from shopping to investments "only to realize, several months later, that they have this huge taxable event" to report and pay taxes on, but don't have the cash to cover the taxes owed.
You just retired. You may no longer have a job, but you still have taxes to file. Well, probably. If you only get Social Security, you're off the hook. But if you earn any other income, you're not.
"Just because you stopped working doesn't mean you stop filing tax returns," says Brian Doherty, president of Filtech, a New York-based consulting company specializing in Social Security claiming strategies. "With retirement age comes distributions from whatever qualified retirement plans you have invested in. One hundred percent of the withdrawals made from these accounts are counted towards [taxable income]."
If possible, he says, the family's breadwinner should delay claiming full working benefits until age 70.
"The reason this strategy is beneficial from a tax perspective is because the Social Security Administration only counts 50 percent of your Social Security benefits as part of your gross income when they determine the percentage of your benefits that will be subject to tax," Doherty says.
If the number is over a certain threshold, you will have up to 85 percent of every Social Security check you receive taxed at whatever rate applies to you, he explains.
A loved one died. Unfortunately, not all life events are celebratory. If a spouse dies, you'll have to address that in your taxes.
"The year in which the spouse dies is the last year in which the two spouses can file a joint income tax return. A joint return can be filed for that year even if the spouse was alive for short time in that calendar year," says Beth Shapiro Kaufman, an estate planning attorney in the District of Columbia. "If there's an option to accelerate income into that year, that could be more advantageous than having the income taxed in the following year when the spouse will be taxed as a single individual."
Kaufman also points out that if your spouse had an individual retirement account, you might be the designated beneficiary. "The spouse will usually be able to defer the income taxes for a longer period of time if the spouse does a spousal rollover of the IRA, so that the IRA actually becomes the spouse's IRA."
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