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8 Common Life Events That Affect Your Taxes

Updated for Tax Year 2017


OVERVIEW

If one thing in life is certain, it's that your taxes will never stay static. Events in your own life as well as frequent adjustments by legislation can be cause for either increasing or decreasing your taxes. Here are a few life examples that can significantly adjust your tax outcome.


 

The article below is accurate for your 2017 taxes, the one that you file this year by the April 2018 deadline, including a few retroactive changes due to the passing of tax reform. Some tax information below will change next year for your 2018 taxes, but won’t impact you this year. Learn more about tax reform here.

Introduction

If one thing in life is certain, it's that your taxes will never stay static. Events in your own life as well as frequent adjustments by legislation can be cause for either increasing or decreasing your taxes. Here are a few life examples that can significantly adjust your tax outcome.

1. Tying the knot

While you're not likely to marry someone just to save on taxes, the fact remains that getting hitched often results in a welcoming tax break. Filing jointly will typically award you lower tax rates plus higher deductions and exemptions. However, there are certain situations where being married can increase your taxes.

2. Growing your family

Having a baby or claiming dependents can greatly reduce your tax rates. Not only can a baby grant you an additional dependent tax deduction, you also get access to the Child Tax Credit, plus a host of other potential tax benefits - from credits for education to the Earned Income Tax Credit.

3. Educational expenses

Not only can costs associated with school pay dividends in terms of job opportunities and career enhancement, it can also result in tax benefits. The American Opportunity Credit and the Lifetime Learning Credit can help offset $2,000 or more of your qualifying educational expenses. If you're paying off a student loan, you can deduct up to $2,500 of your interest on your taxes. The cost to obtain certain professional certifications or designations can also be written off on your taxes.

4. Buying or selling a home

When buying a home, there are many deductions you can take advantage of, including paid points, your mortgage interest and any real estate taxes. If you're looking to sell, you can avoid taxes on up to $500,000 in gains if filing jointly.

5. Accepting a promotion

Although a great reward, a work raise may kick you up into another tax bracket level, increasing the amount you'll pay on every additional dollar you earn. It's usually a good trade off, but worth being aware of come tax time. It might be a good idea to adjust your W-4 withholdings as well.

6. Retirement contributions and distributions

Contributing to a tax-advantage account such as a 401K plan or individual retirement account can get you rewarding tax deductions, and the more you put in the better. However, once you start taking money out of your plan, expect to be taxed on that distribution.

7. Accepting an inheritance

Most money received from an inheritance is tax-free. However, if you receive an IRA as part of an inheritance, odds are you'll be taxed on any distributions. If you receive property, keep in mind there is a "step-up" in cost to the value at the time of the decedent's death and if the property gains in value after that, those gains will be taxable.

8. Dealing with a death

In the year that you die, your personal representative will have to file a tax return in your name, same as if you were still alive. Your spouse can file a joint return for that year if he or she so chooses. Depending on the size and composition of your assets, an estate tax return may also need to be filed. After the assets of your estate are distributed, it is the responsibility of your individual heirs to file their own tax returns going forward.

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The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.

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