There are several major life events that affect your tax situation and usually require adjustments on withholdings. Quite often people are caught by surprise with a tax liability following such an event. As our lives are constantly changing, it is important to address a list of things that can influence your tax situation.
- Getting Married – Congratulations! Your Filing status has now changed to Married and you need to keep your partner’s income accounted for when you are changing your withholdings. If both partners have income and claim married on a W4 without accounting for the total income you will very likely wind up with a tax bill. Most married couples file married joint, however, there are a few rare occasions where it is more beneficial to file married separate as it disallows some credits you are able to take when you are filing together.
- Divorce – After a divorce you need to make sure you adjust your withholdings to single from married to avoid withholding too little and having a tax liability. You need to also take into consideration if children are involved, which partner gets to claim them on the Tax return with the credits connected to your children.
- The family is growing – Congratulations on the new baby! This is one life event that will give you extra credits. You will now be eligible for the Child Tax Credit, the child and dependent care credit (deduction for that may vary yearly) and depending on income level you may also get the EIC (earned income credit). Keep in mind when your child turns 17 your Child Tax Credit will drop from $2000 to $500. If your teenager has a job and earned income but they are still a qualified dependent of yours he/she will have to file a dependent tax return. If your child’s return is not filed as a dependent return the IRS will reject your tax return when you are trying to claim your child as a dependent.
- Buying or selling a home – The purchase of a home will allow you to deduct the mortgage interest and property taxes. This may make you eligible to itemize your taxes instead of using the standard deduction. If you are selling your home you will have to account for that on your tax return as well and based on several factors you can potentially end up with capital gain taxes.
- Starting a new job, additional job or getting a promotion – Make sure you and your partner/spouse are adjusting your W4 withholdings to account for all income to avoid a tax liability.
- Retirement – If you are withdrawing from a Traditional IRA your retirement will be taxed with your ordinary income tax rate. Roth IRA withdrawals do not get taxed. If you are receiving military retirement you must pay tax as well. VA Disability is not taxable.
US Bank Article – How Your Taxes Can Change After a Major Life Event
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