We all know that well-worn saying about death and taxes. While we never know for sure when the former will come for us, we do have some ability to get ahead of the latter. Legislative adjustments and significant life events can and do affect your tax liability. However, if you arm yourself with knowledge, you can be prepared for whatever the tax department throws at you.
In the following paragraphs, we’ll cover the life events that have the most profound impact on your tax obligations. By the conclusion, you’ll know what to expect should any of them occur.
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Getting Married
For the most part, getting married is good for your taxes. When you tie the knot and file jointly, you enjoy lower tax rates and higher deductions. With that said, there are some circumstances where getting hitched can result in paying more, so if this is a concern for you, consult a local tax accountant to help you figure out how your nuptials might affect your tax return.
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Having Kids
Having kids will reduce the amount of taxes you owe. Each child you have reduces your tax liability and entitles you to some tax benefits, including the Child Tax Credit, education credits, and the Earned Income Tax Credit. Of course, there are restrictions on who qualifies for these credits. However, your accountant or tax preparation software should walk you through each credit/deduction individually.
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Buying or Selling Property
Buying a home, especially your first one, can significantly reduce your tax obligation. For example, you can deduct your mortgage interest, real estate taxes, and paid points. If you sell your home, you could avoid paying taxes on up to $500,000 in gains by filing jointly with your spouse.
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Getting a Promotion
While a promotion usually comes with a pay raise, the extra money might just put you in a higher tax bracket, which means you’ll pay a higher tax rate on any extra money earned. While this sounds like a bad deal, most promotions are worth it. If you get a promotion, consider updating your W-4 withholdings to counteract the higher tax rate.
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Retirement
Contributing to a retirement plan like a 401k is always a good idea. Throughout your career, the money you (or your employer) contribute to the plan is tax-free. The money comes off the top of your earnings before taxes. However, once you start collecting on your 401k after retirement, any money you receive from the plan will be taxed.
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Death
When you die, your spouse or personal representative must file a final tax return. Your spouse may file a joint return if they choose, but if your assets amount to enough, an estate tax return may be required. Once all your assets have been distributed to your heirs, they will be responsible for filing their returns and including their inheritances.
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Inheritance
If you receive money as an inheritance, it won’t be considered “income” for tax purposes. If you receive money via an IRA, however, you can expect to pay taxes on any distributions from it. If you receive property as an inheritance, you will likely be taxed on the increased value of the property at the time of the decedent’s death.
As you can see, several major life events can affect your taxes. If any of these occur in your life and you aren’t sure how it will impact your tax return, contact a reputable accountant to ensure you get the best outcome.
