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 8 common life events you should know that may affect your taxes.
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. 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. Not only can a baby grant you an additional child tax credit, you also get access to a host of other potential tax benefits - from credits for education to the Earned Income Tax Credit.
3. Educational expenses
The costs associated with school can 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. Through 2017, these cost can be deducted as an unreimbursed employee expense if you itemized your deductions. After 2017, only the self-employed can take these type of expenses when they qualify as a business deduction.
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 generally 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" to your "cost-basis" to the value at the time of the decedent's death. If the property gains in value after that, those gains will generally be taxable.
8. Dealing with a death
In the year that you die, your personal representative will have to file a final 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 that include any inherited assets going forward.
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