Life Events That Might Impact Your Taxes

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About Eric Hutter

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Eric Hutter is the host of the Safe Money Radio Show, a national presenter of Safe Money Concepts. He is proud to help individuals across the nation protect their retirement savings. “Over the decades, I have guided people to protect millions in retirement assets, not one of these people ever lost a dime to market fluctuations. There is great joy in being able to help people have peace of mind about their financial future.” He and his wife, Laura, reside in Florida. They are family-oriented and proud to be closely connected to their 14 nieces and nephews. They are enjoying activities such as boating, fishing, biking, hiking, and reading.

Disclaimer: The information below is meant just information.  Before making any final decision regarding taxes and other important events, always consult a licensed and authorized professional.

Life is full of significant events that may profoundly affect your financial situation, particularly when it comes to taxes. Understanding how major life changes impact your taxes is crucial for effective financial planning. This article explores several life events that might alter your tax obligations and provides insights into how to manage these changes.

Getting Married or Divorced

One of the most significant life events that affect your taxes is a change in marital status. When you get married, you may file jointly or separately with your spouse. Filing jointly often results in a lower tax bill due to beneficial tax brackets and increased deductions. However, if one spouse has significant medical expenses or miscellaneous deductions, filing separately might be advantageous.

Conversely, divorce may complicate your tax situation. Post-divorce, your filing status will change, potentially increasing your tax liability. Additionally, alimony payments used to be tax-deductible for the payer and taxable for the recipient, but this changed for divorces finalized after December 31, 2018, due to the Tax Cuts and Jobs Act (TCJA).

Having a Child

Welcoming a new child into your family may significantly impact your taxes. You might claim the Child Tax Credit, which is worth up to $2,000 per qualifying child under age 17. Additionally, you may qualify for the Child and Dependent Care Credit if you pay for childcare so you are able to work or look for work. These credits may reduce your tax liability substantially.

Furthermore, having a child may make you eligible for the Earned Income Tax Credit (EITC) if your income falls below certain thresholds. This credit is designed to benefit low-to-moderate-income working families and may lead to a substantial refund.

Buying or Selling a Home

Purchasing a home offers multiple tax advantages. Homeowners may reduce their taxable income by deducting mortgage interest and property taxes on their federal tax returns. These deductions are especially beneficial during the initial years of a mortgage when the interest payments are higher.

On the other hand, selling a home may also influence your taxes, especially if you realize a gain from the sale. The IRS permits individuals to exclude up to $250,000 of capital gains from the sale of a primary residence ($500,000 for married couples filing jointly), provided certain criteria are met. Any profit exceeding these exclusions is subject to capital gains tax.

Changing Jobs or Unemployment

A change in employment status may affect your tax situation in multiple ways. If you receive a raise or a bonus, your income tax liability may increase. Conversely, job loss or a pay cut may reduce your taxable income, possibly qualifying you for different credits or deductions.

If you receive unemployment benefits, remember that these payments are considered taxable income. You may want to withhold taxes from your unemployment benefits or make estimated tax payments to avoid a large tax bill when you file your return.

Retirement

Entering retirement brings about several changes in your tax situation. Withdrawals from traditional IRAs, 401(k)s, and other retirement accounts are generally considered taxable income. However, Roth IRA withdrawals are tax-free if certain conditions are met.

Social Security benefits may also be taxable, depending on your total income. If you have other sources of income in addition to Social Security, up to 85% of your benefits may be susceptible to federal income tax.

Death of a Spouse

The death of a spouse is a profoundly difficult event that also affects your taxes. In the year of your spouse’s death, you may still file a joint return, which often provides the best tax benefits. After that, your filing status will change to single or head of household if you have a qualifying dependent.

Surviving spouses may also face estate taxes if the estate exceeds certain thresholds. However, the Tax Cuts and Jobs Act significantly increased the estate tax exemption to $11.7 million per person (for 2021), so fewer estates are subject to this tax.

Managing Life Events for Optimal Tax Benefits

To navigate the tax implications of these life events effectively, consider the following tips:

  1. Stay Informed: Tax laws change frequently. Keeping up-to-date with the latest changes ensures you take advantage of all available deductions and credits.
  2. Seek Professional Advice: A tax professional may provide personalized advice tailored to your specific situation, helping you make informed decisions and optimize your tax outcomes.
  3. Plan Ahead: Proactive planning may help you anticipate and manage the tax impact of major life events. For example, adjusting your withholding or making estimated tax payments might prevent unexpected tax bills.

Life events can significantly impact your taxes, but with careful planning and professional guidance, you may navigate these changes and make the most of available tax benefits.

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About Eric Hutter

Eric Hutter is the host of the Safe Money Radio Show, a national presenter of Safe Money Concepts. He is proud to help individuals across the nation protect their retirement savings. “Over the decades, I have guided people to protect millions in retirement assets, not one of these people ever lost a dime to market fluctuations. There is great joy in being able to help people have peace of mind about their financial future.” He and his wife, Laura, reside in Florida. They are family-oriented and proud to be closely connected to their 14 nieces and nephews. They are enjoying activities such as boating, fishing, biking, hiking, and reading.

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Content in our posted articles is deemed to be accurate but topics, facts and laws can change. It is always a good idea to verify facts before making decisions. Always seek authorized and professional advice regarding financial decisions which includes investing, annuity purchases, tax planning, changes in a financial portfolio and retirement planning.

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