60-Second Guide to Taxes at Every Age
No matter what stage of life you're in, there's always something going on with your taxes that you need to know about. If you've got 60 seconds, you can learn more about taking care of your taxes no matter what your circumstances.
0:60: Starting a new career
A new career means a time of new opportunities. The day you start it might be one of the proudest of your life. Whether it's a part-time job while you're in high school, or the dream job you accept after earning your advanced degree, the nitty-gritty is the same: Your employer will give you a paycheck, and Uncle Sam will take some of that paycheck as income tax withholding. How much? That depends on how you complete your W-4 withholding form.
And how should you complete your withholding form? If you're a student, you may be able to claim an exempt status because your income is so low you won't have a tax liability. If you have a spouse, children, and a mortgage, you can claim additional exemptions and reduce your withholding.
0:49: Paying attention to the right changes
Lots of things can change over time. Whenever something changes, make sure you stay on top of it with your withholding at work. In particular, look at these factors:
- Filing status: Are you single, married, head of household, married filing separate, or a qualifying widow/widower? How you file will affect your desired withholding.
- Children/dependent status: If you have kids, you might qualify for the Child Tax Credit.
Do you have to pay a babysitter to watch your child while you (or you and your spouse) are working? If so, you may qualify for the Dependent Care Credit.
And if you're on the lower end of the wage spectrum, you might also qualify for the Earned Income Credit, in which Uncle Sam gives you back more in withholding than you've paid in.
If you have a dependent who is not a child, such as a parent, other deductions and/or credits might also apply to you.
- Other income/deductions: Do you have substantial other income, such as interest and dividends? If so, you'll have to adjust your withholding to make up for that additional income.
How about deductions? If you have a mortgage or are otherwise able to itemize your deductions, you can adjust your withholding allowances upward to reflect your lower tax liability.
Starting to pay off student loans? Some of the interest you pay might be deductible, so you'll want to adjust your withholding allowances accordingly.
0:41: Hitching your finances
Getting married is about much more than just unifying your finances. It can have a big impact on your taxes as well. The marriage penalty sometimes means you'll pay more in taxes than you used to when you were single. On the other hand, if only one spouse works, you could see big savings in your tax bill. It all depends on your particular situation -- so take a look and see how things turn out for you.
0:33: Kiddie time!
Congratulations! You have a bouncing baby tax deduction. Seriously, taxes are probably the last thing on your mind with a newborn in your life. But while they'll hardly pay all the expenses of bringing a new child into the world, tax breaks for children can at least put a dent in some of the costs. Look for ways to save with child tax credits, education savings incentives, and day-care reimbursement.
0:19: Leaving your job
If you're retiring, you're probably ecstatic. But if you're leaving for another job -- or, worse, if your employer has asked you to leave -- the experience might be bittersweet. Keep these tax issues in mind:
- Retirement plan distributions: What should you do with them? If you're simply changing jobs, your best bet is probably to transfer your retirement assets -- such as a pension and/or 401(k) plan -- to a traditional rollover IRA. If you move the funds into your personal account, they will be subject to taxes and possibly penalties. But if you transfer them to a traditional rollover IRA, you can avoid current taxation. Even better, in an IRA, you're in control of your investment decisions, not some mutual fund manager. You might be able to move your retirement assets directly from your previous employer's plan to your new employer's.
- Retirement payments: If you take your retirement as an annuity rather than a lump sum, make sure to review your withholding again. Your tax bracket could change, and you'll have to understand how your new tax rate will affect the taxes (and withholding) on your retirement funds.
Alternatively, you might opt not to have any withholding taken from your retirement payments. In that case, learn how estimated taxes work and how to play that game to avoid underpayment penalties.
- Social Security: Did you know that at certain income levels, up to 85% of your Social Security benefits will be taxable? If this surprises you, you need to read more about the taxability of Social Security benefits.
0:05: Riding off into the sunset
If you've gotten this far, congratulations! But you're never done, since tax laws seem to change constantly. Just make sure you stay on top of the latest developments, and you'll be fine.
For more on your life and taxes, read about:
- What tax challenges you'll face when you get married or divorced.
- How dependent care benefits can save you money.
- What college tax breaks you can use.
- How to deal with taxes on your new business.
- How to avoid tax-time surprises.