Life is always changing. Reaching major milestones such as getting married, buying a house or going to college can affect your taxes. Usually for the better because you can qualify for more money-saving credits and deductions. Here are some life events that can change your tax situation and what to expect.
Marrying the love of your life
Congrats on your new marriage! No matter when you got married in 2019, even if it was on December 31st, the IRS considers you to be married for the entire year. When you file your taxes, you now have the option of filing a joint return with your spouse or both parties can file separately. Keep in mind that filing together is more beneficial because your standard deduction will be higher, and you’ll qualify for more tax breaks. If you changed your last name, you must notify the Social Security Administration before using your new name on your tax return. Failing to do so will result in your return being rejected, which obviously slows down your refund.
Having a baby
Close to 4 million babies are born each year in the U.S. Adding a little one to your family means you can now claim the Child Tax Credit. It is worth up to $2,000 per qualifying child and up to $1,400 is refundable. Having a child also makes it easier to qualify for the Earned Income Tax Credit (EITC). Although the EITC was designed to help all low to moderate income workers, having dependents entitles you to a higher credit amount. This year, it is worth up to $6,557. Finally, if you pay someone to babysit while you go to work, hold on to your receipts. Your expenses may make you eligible for the Child and Dependent Care Credit. It is worth a percentage of your qualified expenses for a child under 13 years old. The easiest way to claim every tax break you deserve is to use ezTaxReturn to do your taxes.
Buying or selling a house
Being a homeowner has major tax benefits. If you itemize, you can deduct the interest paid on mortgages up to $750,000. Plus, you can also deduct up to $10,000 combined for state and local taxes, real estate taxes and personal property taxes. The best part is that when you’re ready to sell, your profits may be tax-free. If you lived in the home for at least 2 of the last 5 years, you can exclude up to $250,000 of gains ($500,000 if married filing jointly).
Going to college
Between tuition, books and other related expenses, going to college can be very expensive. The good news is that the IRS offers a couple education credits which can ease the burden. During your first 4 years of college your expenses can make you eligible for the American Opportunity Tax Credit. The credit is worth up to $2,500, forty percent of which is refundable per eligible student. So, if your credit is more than the taxes you owe, you can receive the remaining credit as a refund. The Lifetime Learning Credit is worth up to $2,000 for qualified education expenses per return. The catch is that you can’t double dip. You must choose one or the other and ezTaxReturn can help you make the right choice. Once you start making payments on your student loans, you’re allowed to deduct up to $2,500 of interest on your tax return.
Getting a new job
Most employers ask you to complete a form W-4 when you start a new job. The information you provide is used to calculate how much taxes to withhold from your pay. If you overpay throughout the year, you will get a refund at tax time. That’s right, the big fat refund check everyone looks forward to isn’t actually free money. It’s your own money that you let the government borrow interest-free and now they’re giving it back. On the flip side, if enough taxes aren’t withheld from your pay, you’ll owe Uncle Sam when you file in April.
Retirement contributions and distributions
Contributing to your employer’s 401K does more than just help you prepare for the future; it can lower your tax bill. Every dollar you contribute to the plan reduces your taxable income by the same amount. Plus, your employer may offer to match a percentage of your contributions. So, don’t miss your chance to get free money. For 2020, the 401K contribution limit is $19,500. If you’re aged 50 or older, you can contribute an additional $6,500.
Sometimes when people are strapped for cash, they try to tap their retirement accounts early. This is a bad idea because it will trigger a 10% early withdrawal penalty. Your best bet is to leave the money alone until you reach age 59 ½ or hope that you qualify for an exception.
Losing your job
If you lose your job through no fault of your own, you may qualify for unemployment compensation. This can help you keep the lights on and food on your table while you look for work. However, you may be surprised to learn that unemployment compensation is considered taxable income. At the end of the year, you’ll receive Form 1099-G showing how much you received and are expected to report the information on your tax return. ezTaxReturn supports unemployment compensation and many other types of income. So, file now.
Becoming a caregiver for your aging parent
Unfortunately, your parents won’t be young and vibrant forever. At some point you may have to take on the role of caregiver which can take a toll on your finances. A study found that caregivers spend more than $7,400 of their own money annually to help a loved one. The silver lining is that your wallet may find some relief at tax time. If your parent is listed as a dependent on your return, you may qualify for the Credit for Other Dependents. It can lower your tax bill by up to $500. If you paid for your parent’s medical and dental care, you’re allowed to deduct those expenses on your tax return when you itemize. However, you can only deduct the portion of the expenses that exceeds 10% of your adjusted gross income.