For many people, taxes are a once per year endeavor. For singles who earn most their income through wages and don’t yet own a home, it’s often easy enough to submit their tax documents into an online tool and have their tax return spit out on the other side (usually with a small refund to go with it).
But, as life unfolds, additional tax complexity usually comes with it. The biggest ramification of this is the need to start thinking about taxes more than once per year. For many people, that’s when do-it-yourself software solutions such as TurboTax become insufficient.
We’ve outlined the top 5 life events that often lead to taxpayers seeking professional tax help both inside and outside of the traditional tax season.
1. Hearing Wedding Bells
Getting married comes with all sorts of financial implications. For starters, the average cost to throw a wedding is $33,391 (according to The Knot)! But we’re focused more on the personal finance impact, with spouses merging finances such as a joint bank account and later combining their next tax return filing.
When you get married, the IRS treats you as married for that entire tax year, regardless of the actual date of the wedding. So even if you have a NYE wedding on Dec 31, 2018, you will be treated as married for all of tax year 2018 when you file your tax return in 2019.
When file a tax return as a married couple, you will face a new tax filing status: either married filing jointly (MFJ) or married filing separately (MFS). Most couples will be better off choosing to file MFJ, but both of these filing statuses come with different tax brackets than the ‘single’ filing status.
What that means is that your combined taxes might go up (referred to as the “marriage penalty”) or down (referred to as the “marriage bonus”). It’s important to determine what will happen in your case, as you might need to adjust your Form W-4 allowances so that your tax withholding matches up with your new tax liability.
It’s always recommended that new couples have an honest conversation about their combined finances, so include a tax projection as part of that exercise to determine if action should be taken on your tax withholdings. Consult with a tax advisor – because it might be a good time to evaluate your retirement savings and other tax planning tricks.
2. Starting a Family
Taxes are likely the last thing on your mind after giving birth to a new child. But just as the rest of your life will change with the addition of a newborn, so too do your taxes.
There are several ways that having a child impacts your taxes and, thankfully, they are all positive. The most widespread benefit are the child tax credits (note that there are actually three different child tax credits in the tax code). Although the benefits phase-out for higher earners, these credits combined can be worth as much as $3,400 per child. That’s significant money that you might want to factor into your withholding so you have available now, rather than having to wait until you file your tax return.
The tax implications of a child go beyond these standard credits. For those looking to hire someone to help care for their children, you will be entering the world of filing “Schedule H – Household Employment Tax” with your tax return. You are now an employer, which means you are responsible for payroll taxes (Social Security & Medicare). You’ll also might have to issue a 1099 to your employee. Going through a contracting service might save you some administrative hassle, otherwise, consulting a tax advisor upfront is highly recommended to ensure you’re following all necessary tax rules as it relates to being a household employer.
We can’t discuss children without referencing college savings. Section 529 Qualified Savings Plan (known as a 529 Plan for short) is a tax-advantaged account designed to save for future education costs. They work by allowing you to contribute after-tax funds (although certain states give a tax deduction for contributions) that can then grow tax-free as long as the distributions are used to pay for qualified school expenses. In the past, only expenses related to college, university, vocational school, or post-secondary institutions qualified. However, starting with any new contributions made in 2018, funds can also be used for elementary or secondary school education expenses. Great news considering early education costs have been on the rise.
3. Buying a Home
Congratulations, you are either considering buying a home or have bought one! Now it is time to unpack, decorate, and pay the bills. All of these extra expenses are never great but the silver lining is that some of these expenses are deductible. Expenses that are deductible by all taxpayers are:
- Property taxes
- Qualified mortgage insurance premiums
- Deductible mortgage interest, and
- Casualty losses (hopefully this never applies to you)
Unfortunately, the entire expense won’t be fully deductible as each of the above categories is subject to various limitations. For example, the combined total of your state and municipal income taxes plus your property taxes is limited to a maximum deduction of $10,000 in 2018. This means that individuals who are already paying high state income taxes (such as in CA or NY) will have a harder time reaping as big of a tax benefit from homeownership.
The mortgage interest limitation is slightly different. The interest deduction is capped for mortgages above a certain size. This limitation was previously set at $1 million. For new mortgages in 2018 or beyond, the cap was lowered to $750,000.
What’s the bottom line? Your new home likely has tax savings for you, but the exact amount can vary based on your personal circumstances. Make sure you understand your tax savings. That way you can budget correctly before buying a home, and change your wage withholdings once you own the home to capture that tax savings each month (you’ll likely need it for your mortgage payment!).
Learn more about the 2018 changes to homeownership tax rules here.
4. Moving States
Moving across state lines, whether for school or a new job, is extremely common. When moving to a new state, there are a couple things to remember that will have an impact on your taxes.
First, did you live or are you moving to a state with no income tax? Seven states (AK, NV, SD, TX, WA, WY, FL) do not impose income tax on your earnings so you won’t need to file a tax return in those states! However, if the other state you move from/to has income tax, it will be important to show in which state the income was earned on your tax filings so you don’t pay any more than required.
Moving can be expensive. In the past, moving expenses for certain work related relocations were deductible. Unfortunately, the new law suspended this deduction starting in 2018 for everyone other than military personnel. This will be important to take into consideration if you were planning to use this deduction in 2018 to lower your tax liability. One option is to ask your employer to cover as much of the moving expenses as possible!
Lastly, if you relocated but stayed with the same employer, do not assume that your payroll department will automatically capture your relocation. Make sure to file a new set of W-4 forms so that your payroll withholding is correct at both the federal and state level.
5. Starting a New Job
When starting a new job, there is a lot of paperwork. One of the forms you will fill out is Form W-4. This form determines the amount of income tax is withheld from your paychecks. It is important to choose the correct amount of withholding to avoid a large payment or refund when you file your taxes.
For most, tax withheld will closely approximate the final tax liability owed on income earned if the W-4 is filled out correctly. But filling it out correctly is easier said than done. A second job, a working spouse, or other non-wage income can all complicate your withholdings. These factors are important to consider. A tax advisor can help by preparing a full projection to ensure the W-4 sets your withholding correctly.
What if you started a job and received a signing bonus? Well, a bonus is technically treated the same as regular wages. But when you receive a bonus, your employer has a couple of ways to tax it, either at your standard wage rate or as supplemental income taxed at 22%.
Find our more about how bonuses are taxed here.
Staying on top of your taxes throughout the year will save you from big surprises come April.
Facing one of these life events? Consult a Visor tax advisor for guidance.
Anything the article didn’t address? Leave a comment below and we’ll reply ASAP!
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