Handling life changes
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.
Getting married
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 child tax credit
A new baby also delivers a child tax credit — and this gift that keeps on giving every year until your dependent is no longer eligible. If you qualify, you get the full credit no matter what time of the year your child was born. The amount of child credit that you qualify for can reduce your tax bill dollar-for-dollar and even be refunded if it is great than the tax you owe.
For tax years 2018 through 2020 and beginning back again in 2022, the Child Tax Credit is up to $2,000 per child. Up to $1,600 of this amount is refundable for 2024 ($1,400 for 2018 through 2020) using the Additional Child Tax Credit. Children are eligible for the credit for tax years that they are under 17 years old.
Stimulus impact on the Child Tax Credit and on the Additional Child Tax Credit for 2021
Child Tax Credit Changes
There were several changes for 2021 as result of the pandemic. The American Rescue Plan raised the maximum Child Tax Credit in 2021 to $3,600 for qualifying children under the age of 6 and to $3,000 per child for qualifying children ages 6 through 17. Before 2021, the credit was worth up to $2,000 per eligible child, and 17 year-olds were not eligible for the credit.
The Child Tax Credit changes for 2021 have lower income limits than the original Child Tax Credit. Families that do not qualify for the credit using these income limits are still eligible for the $2,000 per child credit using the original Child Tax Credit income and phase-out amounts.
In addition, the entire credit is fully refundable for 2021. This means that eligible families can get it, even if they owe no federal income tax.
Before this year, the refundable portion was limited to $1,400 per child and there were other requirements regarding earned income to obtain the refundable portion. There is not an earned income requirement for 2021.
Advance Child Tax Credit Payments
The expanded and newly-advanceable Child Tax Credit was authorized by the American Rescue Plan Act, enacted in March of 2021. Most families do not need to do anything to get their advance payment. Normally, the IRS will calculate the payment amount based on your 2020 tax return. Eligible families will receive advance payments, either by direct deposit or check.
These payments are an advance of your 2021 Child Tax Credit. The amount that you receive will be reconciled to the amount that you are eligible for when you prepare your 2021 tax return in 2022. Most families will receive about one-half of their tax credit through the advance payments. If you receive too little, you will be due an additional amount on your tax return. In the unlikely event that you receive too much, you might have to pay the excess back, depending on your income level.
For updates and more information, please visit our 2021 Child Tax Credit blog post.
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.
Divorce
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).
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