If you're among the millions of Americans who will experience a significant life change this year (new house, new baby, getting married, etc.), here are some tips for how to handle it come tax time.
Getting married? Accepting a promotion? Buying a home? Even during exciting or trying times in your life, it's good to remember that major life events can affect your taxes in many different ways. These events are sometimes unforeseen, but with some careful planning, you can be sure that your tax burden won't catch you by surprise.
If you have or will be experiencing a significant life change this year, we have the information you need to understand how these changes will affect your taxes.
Are you a newlywed or planning on getting married this year? Congratulations! We hate to add more to your wedding planning to-do list, but there are a few ways that your nuptials will affect your taxes. Following these three tips can help you maximize your tax savings.
Alert Social Security of a name change
If you changed your name or plan to change your name after your wedding day, it's important to let the Social Security Administration know by filing Form SS-5.
- If the name on your tax return does not match the name Social Security has for your Social Security number, your return might be rejected and any tax refund you have coming could be delayed until the discrepancy is resolved.
- If you're up against the tax deadline and don't have time to change your name with Social Security, you can file a joint return with your spouse using your original name (the one that matches your Social Security number) and then straighten things out in time for next year's filing season.
Refine your withholding
Once you've tied the knot, you and your new spouse might need to adjust withholdings from your paychecks. If you and your spouse both work, your combined incomes may move you into a higher tax bracket, so to avoid being caught off guard by an unexpected tax bill or a huge tax refund, you might need to adjust your withholdings on your paycheck.
- To do this, ask your HR department for a new Form W-4.
- The IRS updated W-4 form in 2020, so don't worry if the Form W-4 they hand you looks a little different from the last one you completed.
- You may also want to use an online W-4 calculator to help figure out your withholdings.
Coordinate fringe benefits
Speaking of your jobs, your marriage could open up some new opportunities to save. Draw up a list of the tax-favored fringe benefits at each workplace. If you can be covered by your spouse's medical plan, for example, it might make better financial sense to go on that plan.
For more, see Getting Married.
Having a child
Your new bundle of joy is also a bundle of tax breaks. What you'll lose in sleep, you can gain back in tax deductions. These tips can help you make sure you get every benefit you deserve.
Get your child a Social Security number.
Your key to tax benefits is a Social Security number for your child. You'll need one to claim your child as a dependent on your tax return. You can request a Social Security card for your newborn at the hospital when you apply for a birth certificate. If you don't, you'll need to file a Form SS-5 with the Social Security Administration and provide proof of the child's age, identity, and U.S. citizenship.
Refile your form W-4.
Ask your employer for a new Form W-4 so you can claim your new dependent. Beginning in 2018, dependency exemptions have been replaced with increased child tax credits and a new dependent tax credit that directly lowers your taxes rather than just lowering your taxable income. However, claiming your dependents on your W-4 can reduce the federal income tax withholdings from your paychecks to account for the additional tax benefit.
Claim the $2,000 child credit.
A new baby also delivers a $2,000 child tax credit — and this gift that keeps on giving every year until your dependent child turns 17. If you qualify, you get the full $2,000 credit no matter what time of the year your child was born. The child credit can reduce your tax bill by $2,000 per child.
Contribute to 529 plans.
It's never too early to start saving for your child's future education. When you save money for your child with a 529 plan, those savings can grow tax-deferred. Many states offer tax deductions or tax credits to those who save money with a 529 plan.
For more, see Birth of a Child.
Buying a home
If you are in the market to purchase a home, you'll likely be eligible for some added tax benefits that are not available to renters. At tax time, your house won't simply be your home — it may also be a giant tax deduction.
You might be able to deduct:
- your property taxes
- the mortgage interest on your primary residence, as well as any secondary residence you own (Note: There are limits, but relatively few taxpayers are affected).
- the interest on a home equity loan or home equity line of credit, if used to buy, build, or substantially improve your home (again, limits apply)
- mortgage points you paid when purchasing the house (or convinced the seller to pay for you)
- home improvements required for medical care
For more, see our article on Home Ownership Tax Deductions.
Unfortunately, even in trying times, such as going through a divorce, you'll still need to worry about your taxes. If your divorce is finalized by December 31, you cannot file as married for that year. This will likely result in changes to your tax bracket and deductions. If you have a child and have primary custody of that child after the divorce, then you can likely file as head of household. This distinction will affect the amount of the standard deduction you will receive.
Getting a raise
Did you get a new promotion that comes with a raise? If your promotion and raise will result in you paying more in taxes than you were expecting at the beginning of the year, you may want to ask the boss for a Form W-4 to adjust your withholdings. This can help you avoid a surprise at tax time. To avoid a higher tax burden, you may also consider increasing contributions to your tax-deferred retirement savings accounts or a health savings account (HSA).
TurboTax has you covered
Regardless of what changes in your life, TurboTax has you covered. Our products grow with you and take into account all of the nuances in your tax situation. All you need to do is answer some simple questions about what has changed in your life, and TurboTax handles the rest.