Going to college, having a baby and buying your first home are all huge milestones. You may not realize it but some of the events that take place in your personal life can completely change your tax situation. Each life changing event can open the door to new tax breaks or money-saving opportunities you didn’t know existed. Here’s how some common life events can affect your tax refund or the amount of taxes you owe.
Going to college
Attending college is part of the American dream. It can help you develop your skills, increase your earning potential, and provide greater job security when you enter the workforce. While going to college has numerous perks, a major drawback is the hefty price tag attached. The good news is that the IRS offers a couple education credits which can help ease the burden. You can claim the credit for you, your spouse or your dependent.
During your first four years of college, your expenses can make you eligible for the American Opportunity Tax Credit (AOTC). You can claim your tuition, fees, books and other related expenses. The AOTC is worth up to $2,500, forty percent of which is refundable. That means if your credit is more than the taxes you owe, you can receive the remaining credit as a refund.
You may also qualify for the Lifetime Learning Credit (LLC) which allows you to claim up to $2,000 of your tuition expenses. You do not have to be pursuing a degree, you can claim the credit for professional development and continuing education courses. The catch is that you can’t double dip. You must choose the AOTC or the LLC. Don’t worry, ezTaxReturn can help you make the best choice for your tax situation.
One final note, once you start making payments on your student loans, you’re allowed to deduct up to $2,500 of interest on your tax return.
Getting a new job or a promotion
Landing your dream job or a promotion is another life event that can affect the amount of taxes you pay. When you start your new role, you’ll be asked to complete a Form W-4, Employee’s Withholding Certificate. This will tell your employer how much federal taxes to withhold from your pay. Ideally, you want to check your withholding annually and anytime your personal or financial situation changes. Having too little taxes withheld means you’ll owe the IRS at tax time. On the flip side, if you overpay, you’ll get a refund when you file your tax return. Many people enjoy getting the lump sum of cash, but you’re missing the chance to bring home a bigger paycheck during the year.
Losing your job
If you lose your job through no fault of your own, you may qualify for unemployment compensation. This can help you keep the lights on and food on your table while you look for work. However, you may be surprised to learn that collecting unemployment compensation will affect your taxes because it’s considered taxable income. At the end of the year, you’ll receive Form 1099-G showing the amount you received and you must report the information on your tax return.
Retirement contributions and distributions
According to Gallup, the average retirement age in the U.S. is 61. Start planning now, so you can live comfortably when the time comes. If your employer offers a 401k, aim to save 10% to 15% of your income annually. The account is funded with pre-tax dollars, so every dollar you contribute lowers your taxable income by the same amount. As a result, you’ll pay less taxes when it’s time to file. Many employers also offer to match a portion of your contributions which will help your savings grow faster. For 2023, workers can contribute up to $22,500 to their 401k. Workers aged 50 or older can also make up to $7,500 in catch-up contributions.
Sometimes people dip into their retirement accounts early when they’re strapped for cash. This is a bad idea because it will trigger a 10% early withdrawal penalty. Your best bet is to leave the money alone until you reach age 59 ½ or hope that you qualify for an exception.
Walking up the aisle
A lot of things change when you say “I do” and your taxes are no exception. Even if you get married on December 31st, the IRS considers you to be married for the entire year. When you file your taxes, you now have the option of filing a joint return with your spouse or both parties can file separately. Keep in mind that filing together is more beneficial because your standard deduction will be higher, and you will qualify for more tax breaks. The 2023 standard deduction for married filing jointly is $27,700 versus only $13,850 for married filing separately.
If you have changed your last name, you must notify the Social Security Administration (SSA) before using your new name on your tax return. Otherwise, your return will be rejected.
Giving birth or adopting a child
Adding a little one to your family is another life event that can have implications on your taxes. It can open the door to valuable tax breaks and a higher standard deduction. One of the most popular tax breaks you can claim is the Child Tax Credit. It is worth up to $2,000 per qualifying child and up to $1,600 is refundable. Having a child can also make it easier to qualify for the Earned Income Tax Credit (EITC). Although the EITC was designed to help all low to moderate income workers, having dependents entitles you to a higher credit amount. For tax year 2023, it is worth up to $7,430.
If you pay someone to babysit while you go to work, hold on to your receipts. Your expenses may make you eligible for the Child and Dependent Care Credit. It is worth 20-35 percent of your qualified expenses for a child under 13 years old.
Finally, if you’re a single parent and paid more than half of the household expenses, you can use the head of household filing status instead of filing single. The 2023 standard deduction for single filers is $13,850 and $20,800 for head of household. Simply changing your filing status can save you $6,950.
Buying or selling a home
Becoming a homeowner is a major accomplishment. If you itemize, you can deduct the interest paid on mortgages up to $750,000. Plus, you can also deduct up to $10,000 combined for state and local taxes, real estate taxes and personal property taxes. The best part is that when you’re ready to sell, your profits may be tax-free. If you have lived in the home for at least two of the last five years, you can exclude up to $250,000 of gains ($500,000 if married filing jointly).
Becoming a caregiver for your aging parent
Unfortunately, your parents won’t be young and vibrant forever. At some point you may have to take on the role of caregiver which can take a toll on your finances. A study found that caregivers spend more than $7,200 of their own money annually to help a loved one. That’s about 26% of their income. The silver lining is that your wallet may find some relief at tax time. You can list your parent as a dependent on your return and claim the Credit for Other Dependents. It can lower your tax bill by up to $500. If you’re paying for your parent’s medical and dental care, you can itemize and deduct those expenses on your tax return. However, you can only deduct the portion of the expenses that exceeds 7.5% of your adjusted gross income.
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The articles and content published on this blog are provided for informational purposes only. The information presented is not intended to be, and should not be taken as, legal, financial, or professional advice. Readers are advised to seek appropriate professional guidance and conduct their own due diligence before making any decisions based on the information provided.
