Life changes often, and as it does, so do tax obligations. With a wide range of requirements under the U.S. Tax Code as well as numerous state and local taxes to follow, it can be hard for individuals to stay ahead of their obligations. At the same time, as life changes, new tax credits and deductions become available, opening the door for opportunities to save money.
There are some big events that occur in many lives that alter tax situations that need to be a careful consideration. While every taxpayer needs to ensure their annual tax obligations are met and that they are not overpaying for taxes each year, there are certain life events that trigger a need to make some changes.
Getting married can change the game for many tax filers. Marriage often brings with it a
There are some situations where getting married can raise your taxes, though. For example, if your combined income is much higher, that could mean a higher tax bracket for some people. That’s why it’s so important to work with a tax professional that first year to ensure you get any tax deductions owed to you and to file appropriately.
Having children is another big life event that can impact your tax obligations. Once you have a child, you can claim a dependent on your tax return. This typically reduces your taxable income significantly – you have another mouth to feed, after all. You may get an additional child tax credit for each child you have.
It’s also wise to work with a tax professional now to find out what steps you can take to save for your child’s educational needs and which credits may be available to further lower your costs. You may even be able to deduct some of your child’s birth expenses on your itemized return.
Real estate is a big investment and one you should make with a careful eye on your future. There are tax implications for owning a home, for example. Buying a home with a mortgage may mean that you now have a mortgage, and in most situations, your mortgage interest paid is tax deductible.
Any advanced interest payments you’ve made, such as points, may also help to reduce your tax obligations. Your mortgage interest deduction could be sizable and lower your taxes considerably.
What if you sell your home? There are a few factors to consider here, too. For example, if you own your home and have lived there for at least 2 of the five years prior to the year that you plan to sell it, you can claim up to $250,000 profit as tax-free (if you sell your home for that much more than what you bought it for.
That’s if you are married and filing a joint return. If your profit is higher than this, up to $500,000, you will have to report that sale’s income as capital gains, and that could increase your taxable income significantly.
As a new business owner, having a tax professional available to guide you may also help you reduce the risk of over- or underpaying taxes. It may also provide more insight into tax reduction opportunities that may become available over time.
When you’re thinking about planning for retirement, you’ll want to take advantage of all tax-advantaged options. For example, contributing to a retirement plan, like an IRA or 401(k), could help you to qualify for tax savings throughout the time you’re working and contributing to it.
However, entering into retirement is likely to change the tax scenario as well. For example, if your income drops, you’ll fall into a lower tax bracket, and that could save you money. Depending on the type of retirement account you have, you may also be required to take minimum distributions from your retirement accounts (typically when you are 72 years of age). That could impact your income and taxes paid.
Because there are so many changes that occur throughout your lifetime, it’s always wise to work closely with a tax professional who can help you navigate those ups and downs with a keen eye for finding ways for you to consistently pay only what you owe.
Taxes are a part of life, and while you cannot often change that, you can ensure you do not overpay for taxes throughout your lifetime with a bit of help and guidance. The MB group is here to help, so be sure to contact us as you approach any life milestone.