Life is full of ups and downs, many of which can greatly impact your taxes for the year in which the milestone takes place. Here are just a few events that have tax implications for which you should be prepared.
Starting a New Job
When you start any new job, you should make any necessary adjustments to your tax withholding so you aren’t penalized for not withholding enough when you file. If you are relocating for your new gig, you may be able to deduct some of the moving expenses as long as your employer isn’t paying for them. Also, if you had a retirement plan with your last employer, you will need to decide what to do with that money now that you are in your new position. Moving it to another retirement account is usually not taxed, but cashing it in would likely be taxed at a relatively high rate.
Going to College
Whether you are sending a child to college or going back yourself, there are some tax credits that you may be able to take advantage of. If the classes you take are not part of a degree program, you may be able to claim a lifetime learning credit of up to $2000 for expenses associated with these classes. For those attending their first four years of college, you may qualify for the American opportunity credit to apply toward college costs. Additionally, the interest paid on certain student loans may be eligible for a $2500 deduction.
First of all, congratulations! Make sure you file as either married filing jointly or married filing separately on your return next year. If one or both parties work, it is likely that you should adjust your withholding. And if you changed your name, you definitely need to inform the Social Security Administration so their records are changed to match your tax return.
We are sorry to hear that but be prepared for some changes to your tax situation. Of course, you will have to change your filing status on your next return to single, or you may be able to file as head of household if you have at least one dependent child. Make sure to discuss how you will divide your dependents, deductions and credits with your ex-spouse during the divorce proceedings to avoid issues at tax time. And keep in mind that alimony, child support and childcare tax credits will all have tax implications, so be sure to research what you are eligible for and what you are not.
Having a Baby
Congratulations on your new dependent, and you may be eligible for other deductions or credits as well. First, get your baby’s Social Security number as soon as you can otherwise you can’t claim him or her on your taxes. Other tax credits that may apply if you meet the requirements are the Adoption Tax Credit (if your child is adopted), Earned Income Tax Credit (for low or middle income earners) and the Child and the Dependent Care Tax Credit (to help cover the cost of babysitters and nannies).
There are many financial and tax-related decisions to make at this point in your life, but here are just a few to get you started. If you are retiring early and start withdrawing from your retirement account, you could be subject to a penalty. As you start taking distributions from your IRA or 401(k), remember this is considered taxable income since you didn’t pay taxes when you made the contributions. Roth IRAs are the opposite, and you pay taxes when you contribute rather than when you withdraw, but you can’t roll your traditional account into a Roth to avoid paying taxes. When you turn 70 ½ you have to take a certain distribution annually too.
Regardless of what life brings, it pays to take are regular look at your big picture and how taxes play into it. If we can help answer any questions or show you your options, let us know!