9 Life Events That Have a Major Impact on Your Taxes

Taxes can be a tricky subject, and sometimes, life’s big events can make it even more complicated. Whether you’ve gotten married, had a baby, changed jobs, or bought a home, these life events can significantly impact your taxes, your refund, and your financial planning. Staying informed about how these changes affect your taxes can help you avoid surprises when filing your return. Additionally, these life events can also provide access to new health insurance options through programs like the Health Insurance Marketplace. Here are the major life events that could change the way you file your taxes.

1. Marital Status Changes

Marriage

Getting married can have a significant effect on your tax situation. When you file as a married couple, you typically have two options: filing jointly or filing separately. Most couples choose to file jointly because it often results in a lower tax bill due to better tax brackets and a higher standard deduction. For tax year 2024, the standard deduction is $29,200 for couples filing jointly vs $14,600 for those filing separately. However, filing separately can sometimes be beneficial in certain situations, such as if one spouse has significant medical expenses or other deductions.

Divorce

If you’ve gone through a divorce, it will also change your filing status. You’ll likely file as “Single” unless you have dependents, in which case you might be able to file as “Head of Household,” which can offer better tax breaks. If you pay alimony, it might still be deductible, but remember that alimony is no longer deductible for agreements made after 2018. Child custody arrangements can also affect how you claim dependents and tax credits.

Divorce can also impact access to new health insurance options. For example, if you got divorced or legally separated and lost health insurance, you qualify for a Special Enrollment period to get coverage through the Health Insurance Marketplace.

Widowhood

Losing a spouse is an emotional time, and it also brings changes to your tax filing. For the two years following your spouse’s passing, you may be eligible to file as a Qualifying Surviving Spouse, which allows you to continue to benefit from the tax brackets of Married Filing Jointly. After that, your status would shift to “Single” or “Head of Household”, depending on your living situation and dependents.

2. Birth or Adoption of a Child

Child Tax Credit

Having a baby or adopting a child may entitle you to the Child Tax Credit. For each child under 17, you could receive up to $2,000 per child. This can lead to a significant reduction in your tax liability, and in some cases, you might be eligible for a refund if owe less than the credit amount.

Dependents

Children often serve as the focal point for numerous tax advantages. By listing your child as a dependent, you may become eligible for the Child and Dependent Care Credit, which helps cover childcare expenses. The arrival or adoption of a child also paves the way for additional credits, such as the Earned Income Tax Credit (EITC), which is particularly beneficial for lower-income families.

Healthcare

If you have a child, they can remain on your health insurance plan until age 26, which can impact your health-related tax deductions. For instance, the Premium Tax Credit may help offset insurance costs, particularly for marketplace plans. You can also deduct medical and dental expenses (above 7.5% of your AGI) for you, your spouse and dependents.

3. Job Changes or Career Transitions

New Job

Starting a new job can be a significant life event that influences your tax obligations. An increase or decrease in income could place you in a different tax bracket, affecting the taxes you owe. It’s essential to update your W-4 withholdings to avoid overpaying or underpaying taxes throughout the year. Additionally, any signing bonuses, relocation allowances, or other financial incentives you receive may be taxable, so it’s crucial to include them in your tax return.

Layoff or Unemployment

If you were laid off or lost your job, you might have received unemployment benefits, which are taxable. Be prepared for this income to be included on your tax return. It’s a good idea to submit Form W-4V, Voluntary Withholding Request to the payer to have federal taxes withheld.

Freelance or Self-Employment

Switching to freelancing or self-employment can have a major impact on your taxes. As a freelancer, you’ll need to file quarterly estimated taxes and may be able to deduct business expenses, such as home office costs, supplies, and even travel related to work. This can be a great way to reduce your taxable income but also requires more planning and attention to detail.

4. Homeownership

Buying a Home

Becoming a homeowner can provide significant tax advantages. If you itemize, you can deduct mortgage interest and property taxes from your taxable income. First-time homebuyers might also be eligible for certain credits or down payment assistance, depending on the state and specific programs available.

Selling a Home

If you’ve sold your home, you might qualify for an exclusion of capital gains tax on the sale of your primary residence. If you have lived in the home for at least two of the last five years, you could exclude up to $250,000 of the gain ($500,000 if married and filing jointly).

Home Office

If you’re you’re self-employed, you may be able to take a home office deduction. This includes a portion of your rent, utilities, and other expenses related to the space you use for work. File your taxes with ezTaxReturn and we’ll help you calculate and claim this deduction.

5. Retirement and Saving for the Future

Retirement Account Contributions

Making contributions to retirement accounts such as a 401(k) or IRA can effectively lower your taxable income for the year. Contributions to traditional 401(k) and IRA accounts are made with pre-tax dollars, which means they reduce your overall taxable income. However, it’s important to remember that withdrawals during retirement will be taxed, so strategic planning for this future tax obligation is essential.

Retirement Plan Distributions

If you’ve started taking withdrawals from an IRA or 401(k), be aware that these distributions are typically taxable. Additionally, if you’re under 59½ and take a distribution, you may face an early withdrawal penalty. It’s also worth noting that Required Minimum Distributions (RMDs) kick in at age 73, and failing to take them can lead to hefty penalties.

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6. Health and Medical Expenses

Health Insurance

Whether your health insurance is provided by an employer or you gain new health insurance options due to life events, the premiums you pay for health insurance might be tax-deductible. If you’re self-employed, you may also qualify to deduct the premiums paid for your spouse and dependents.

HSAs and FSAs

Contributing to a Health Savings Account (HSA) or a Flexible Spending Account (FSA) can lower your taxable income. These accounts are a great way to save for medical expenses, and the funds are tax-free when used for qualified medical costs.

7. Education and Student Loans

Education Credits

If you or a dependent are pursuing higher education, you might qualify for education credits like the American Opportunity Credit or Lifetime Learning Credit. These credits can help reduce the cost of tuition, books, and other eligible educational expenses.

Student Loan Interest

If you’ve taken out student loans, you can deduct up to $2,500 of the interest paid from your taxable income. This deduction is available even if you don’t itemize your deductions, providing a valuable tax benefit for graduates managing student debt.

8. Inheritance and Estate Planning

Inheritance

Receiving an inheritance is generally not taxable at the federal level, but the value of what you inherit may impact your future tax situation. For example, if you inherit stocks or property and later sell them, you may owe capital gains taxes on any appreciation in value.

Gifts

If you give gifts that exceed the annual exclusion limit ($19,000 per person in 2025), you might be subject to gift taxes. However, the lifetime exclusion is quite large, so most people won’t hit the threshold.

9. Natural Disasters and Losses

Casualty Losses

If you’ve experienced the impact of a natural disaster, you may be eligible to claim casualty losses on your tax return. This encompasses damage to your home or personal belongings. Depending on your location, the IRS might offer additional relief, such as allowing you to deduct losses that were not covered by insurance.

Understanding Your Tax Refund

Impact of Life Events on Refunds

Major life events can significantly impact your tax refund, often in ways you might not expect. For instance, tying the knot or welcoming a new child into your family can lead to changes in your tax filing status, deductions, and credits, ultimately affecting your refund amount. On the flip side, events like divorce or losing a job can also have a substantial impact on your tax refund. Understanding how these life events can affect your refund is crucial for effective financial planning.

Consider these common life events and their potential impact on your tax refund:

Marriage or Divorce: Changes in your filing status can either increase or decrease your tax refund. Married couples often benefit from filing jointly, while divorce might shift you to a single or head of household status.
Having a Child: The arrival of a new child can make you eligible for additional tax credits, such as the Child Tax Credit, which can significantly boost your refund.
Job Change or Loss: A change in your income, whether through a new job or unemployment, can alter your tax bracket and, consequently, your refund.
Retirement: Entering retirement can open up different tax deductions and credits, potentially increasing your refund.

Maximizing Your Refund

Maximizing your tax refund requires careful planning and attention to detail. Here are some helpful tips to help you get the most out of your refund:

Keep Accurate Records: Maintain thorough records of your income, expenses, and all tax-related documents. This ensures you can claim all the deductions and credits you’re eligible for.
Take Advantage of Tax Credits: Tax credits, such as the Earned Income Tax Credit (EITC) or the Child Tax Credit, can significantly reduce your tax liability and increase your refund.
Contribute to a Retirement Account: Contributions to retirement accounts like a 401(k) or IRA can reduce your taxable income, thereby increasing your refund.
Itemize Deductions: If you have significant expenses, such as medical bills or mortgage interest, itemizing your deductions can help reduce your tax liability and increase your refund.
Consider Using Tax Software: Tax software can simplify the complexities of the tax code and ensure you’re taking full advantage of all available deductions and credits by providing guided assistance and up-to-date tax information.

By understanding how life events can impact your tax refund and following these helpful tips, you can maximize your refund and keep more of your hard-earned money.

Conclusion

Life events can have a big impact on your taxes, and understanding how to navigate these changes is key to ensuring you’re not paying more than you need to. Whether it’s a change in marital status, the birth of a child, or retirement planning, being proactive about your tax situation can help you make the most of the benefits available. Be sure to consult with a tax professional when life changes occur to ensure you’re taking full advantage of all available tax breaks.