For the most part, our tax situation remains consistent year after year. However, every now and then there are certain life transitions that can dramatically change how you file your taxes, even if just for that year. Here are some of the most common life transitions that can affect your taxes.
While a wedding will bring many types of joy, newlyweds can also celebrate new tax breaks. Once you are married, you and your spouse will likely have the benefit of filing jointly, which can offer lower tax rates and a higher standard deduction. Married couples filing jointly also have extra tax perks to look forward to. For example, if you are not working, you cannot contribute to an IRA account if you are single, but you can if you are married and use your spouse’s income. You can also take advantage of flexible spending accounts (FSAs) and lower health care expenses.
Having a Baby
Having a baby, or growing your family in other ways, can significantly reduce your tax liability. Claiming dependents can grant access to new tax credits and deductions. The Child Tax Credit, Earned Income Tax Credit, Child and Dependent Care Credit, Adoption Credit, the Credit for Other Dependents, and higher education credits are just a few examples of credits available for those who can claim dependents.
If you have recently decided to go back to school, or if you have a dependent who will be attending college soon, you might be able to take advantage of some education-related tax breaks. There are tax credits available to students to help offset qualifying expenses, including the American Opportunity Credit and the Lifetime Leaning Credit. If you have already graduated and are now paying student loans, you can deduct up to $2,500 of your student loan interest during tax time.
Moving Out of State
Sometimes new opportunities come from out-of-state and moving states can affect your tax bill. Aside from moving expenses, you’ll need to figure out if you’ll be paying less or more taxes in your new state of residency. States like California and New York have much higher tax rates compared to others. Some states do not have any income tax. It’s important to factor this into your budget before you decide to make the big move.
Accepting a Promotion at Work
After properly celebrating a job well done, you might want to consider how your new role at work can affect your taxes. A bump in pay can also bump you up into a higher tax bracket, which means more taxes owed. For most, the tradeoff is worth it, but either way you should do the math to be prepared for tax season. To help offset any additional costs during tax time, you can also adjust your W-4 withholding.
Tax Help for All Life Transitions
Often times, you’ll find most of these life transitions that can affect your taxes offer greater benefits than things to worry about. The best thing you can do is prepare for the aftermath of each of these changes. Plan for the year ahead so you are not blindsided by a large tax bill next filing season. If you find yourself scrambling with a large tax liability because you were unprepared, a knowledgeable and experienced tax professional can help. Contact Optima Tax Relief at 800-536-0734 for a free consultation.