Getting married. Having a child. Getting or losing a job. Major life events like these can have a major impact on your taxes. If you're among the millions of Americans who will experience a significant life change this year, here are some tips for how to handle it come tax time.
Tying the knot this summer? Here's what you need to know now that you'll be sharing your life—and your taxes.
Alert Social Security of a name change
If you changed your name when you got married, it's important to let the Social Security Administration know by filing a form SS-5. If the name on your tax return does not match the name Social Security has for your Social Security number, any tax refund you have coming will 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're back from the honeymoon, you and your new spouse need to check in with your bosses to adjust withholding from your paychecks. Sit down with the instructions for the W-4 or a copy of IRS: Tax Withholding? to determine how many withholding allowances you deserve. Once you come up with the proper number, you can divide the withholdings however you choose, recognizing that each allowance is worth more (in terms of reduced withholding and more take-home pay) to the higher earner.
Many working couples have to worry more about under-withholding than over-withholding. The W-4 instructions have a special worksheet to take this into account by walking you through the process of eliminating allowances the other rules say you should claim. Don't think of this as a punishment. The goal is to match withholding with what you'll actually owe for the year, so you get neither a big refund nor a nasty tax surprise when you file.
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 their 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'll be gaining back in tax deductions. These tips can help you make sure you get every benefit you deserve.
Get 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. Failing to report the number for each dependent can trigger a $50 fine and tie up your refund until things are straightened out.
You can request a Social Security card for your newborn at the hospital at the same time 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. If registering newborns strikes you as silly, keep in mind that the aim is to prevent taxpayers from claiming dependents they don't deserve (think parakeets and puppies). Apparently, it's working. In the first year the government required the numbers, 7 million fewer dependents were claimed than the year before.
Claiming your son or daughter as a dependent will shelter $3,950 of your income from tax in 2014. You get the full year's exemption no matter when during the year the child was born. Top-earning taxpayers gradually lose the tax-saving power of exemptions through phase-out rules that reduce the amount of the exemption you can claim. Regardless of your income, if you are hit by the Alternative Minimum Tax (AMT), exemptions lose all of their tax-saving value.
$1,000 child credit
A new baby also delivers a $1,000 child tax credit, and this is a gift that keeps on giving every year until your dependent son or daughter turns 17. You get the full $1,000 credit no matter when during the year the child was born. Unlike a deduction that reduces the amount of income the government gets to tax, a credit reduces your tax bill dollar for dollar. So, the $1,000 child credit will reduce your tax bill by $1,000.
For more, see Birth of a Child.
Buying a Home
If you are among the savvy buyers taking advantage of a depressed housing market, you'll get more than just a break in the price of your new home. At tax time, your house is not simply a home: It can 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 (there are limits, but relatively few taxpayers are affected)
- The interest on up to $100,000 borrowed on a home equity loan or home equity line of credit, regardless of the reason for the loan
- Points you paid when purchasing the house (or convinced the seller to pay for you)
- Home improvements required for medical care.
For most people, the biggest home deduction is for mortgage interest. How do you figure out how much you've paid in mortgage interest during the year?
You should receive a statement from your lender by the end of January listing the mortgage interest you paid during the year. This statement will be labeled Form 1098. It may be attached to, or part of, your monthly mortgage statement, so be sure that you study your January statement carefully to identify any portion labeled as Form 1098. The amount shown as interest paid on Form 1098 is the amount you deduct on your tax return.
For more, see our article on Home Ownership Tax Deductions.
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.