As you prepare for tax season, you need to understand how major life changes can impact the way you file for taxes and impact your tax bill. Here are some things to think about as you review your year and the changes to your life.
Addition of a Child
When you have a child, you add another exemption to your tax situation. You can claim your child on your tax return, and that reduces your income for tax purposes. On top of that, you might also qualify for an increased Earned Income Credit and/or Additional Child Tax Credit. Pay attention to where you stand, and don’t forget to add your new child’s Social Security number to your tax return.
The addition of a child through adoption also comes with tax benefits, including a tax benefit, so don’t forget about that.
If you got married this year, it will impact your filing status. You now need to decide whether you will file jointly or separately. Either way, you will need to list yourself as married, no matter what. Thanks to recent ruling that basically make marriage between same-sex couples legal in every state, past questions about state vs. federal filing status are pretty much settled.
Run the numbers to see whether or not it makes sense to file separately vs. jointly, and go from there.
Your divorce, no matter when it happened during the year, affects your filing status for the entire tax year. If you are the one who claims a dependent child, you might be able to file as “head of household,” which comes with different benefits than filing as single. If you don’t have dependent children to claim, you will need to file as single if you are divorced.
Double-check the requirements for different filing statuses, and realize that if you file as head of household this year, it might not be possible to file that way again in subsequent years. If you have questions about your filing status, talk to a professional or contact the IRS for clarification. A change in your filing status is important because it can impact what tax bracket you are in, and how much, ultimately, you have to pay on your taxes.
Death in the Family
Finally, a death in the family can change your tax situation. You can file as a widow or widower on your tax return, and your situation comes with different tax impacts. Additionally, a death that encompasses the loss of a child can also impact the claims you can make on your tax return. It isn’t pleasant to consider these issues because none of us like to relive these painful losses. However, it’s something you have to think about on your taxes.
Another consideration is a death that leaves you with an inheritance. Depending on your state, you might have additional taxes on top of any federal tax bill that comes when you receive money from a deceased relative. Consult with a professional about how to proceed in these cases.
It can help to get professional help with your taxes if you have experienced a major change in your life in the last year since you will need to know exactly how your taxes will be impacted.