Like it or not, taxes are a part of life, so it stands to reason that when things change in your life, your taxes might follow suit. Here are three significant milestones that could end up impacting your taxes -- ideally for the better.
1. Getting married
Getting married can have a huge effect on your taxes because once you tie the knot, you're eligible to shift your status to married filing jointly. This not only changes your standard deduction, but determines the marginal tax bracket you ultimately fall into.
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It used to be the case that getting married wasn't always so great for your taxes. That's because countless couples -- particularly those with similar earnings -- would historically get slapped with what's known as the marriage penalty, where their combined earnings would push them into a higher marginal tax bracket than what they'd fall into individually as single filers. But thanks to the recently implemented changes to the tax code, the marriage penalty may not be such an issue going forward. That's because most of the new brackets actually take the upper income limits for single filers and double them for married couples filing jointly, which wasn't always the case.
For example, under the new/current system, the outer income limit for single filers in the 22% bracket is $82,500. For married couples, that limit is $165,000 -- exactly double.
However, higher earners who get married and start filing jointly might feel the pain even under the new system. While single filers making over $500,000 will be subject to a 37% tax rate on their highest dollars of earnings, this threshold doesn't double for married folks filing jointly; rather, it increases to just $600,000.
2. Buying a home
Going from renting to owning doesn't just mean being responsible for maintenance and repairs -- items your landlord was formerly burdened with. It could also have a positive impact on your taxes. Provided your mortgage doesn't exceed $750,000, you can deduct the interest you pay on your home loan in full. This can be a rather lucrative deduction, especially in the early stages of your mortgage when more of your payments are going toward interest.
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You can also deduct the property taxes associated with your home, albeit not necessarily in full. That's because the SALT (state and local tax) deduction, which covers property taxes, is now capped at $10,000 under the new laws. (Previously, it was unlimited.) This means that if you live in a state with high property taxes, you might only get to write off a portion of what you pay -- but it's still a tax break nonetheless.
Keep in mind, however, that to capitalize on either of these deductions, you'll need to itemize on your return. Now that the standard deduction is worth virtually twice its former amount for single and married filers alike, it'll make less sense for more filers to itemize going forward.
3. Having a baby
Having a baby won't just wreak havoc on your sleep habits and budget; it'll also affect your taxes, and thankfully, in a positive way. That's because households with children under the age of 17 are eligible to claim the Child Tax Credit, which, as per the new laws, is now worth $2,000 per qualifying child.
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Furthermore, whereas it used to be that the credit phased out for single tax filers earning $75,000 and married couples filing jointly earning $110,000, these income thresholds have since increased to $200,000 and $400,000, respectively. This means that going forward, more households will be eligible for the credit. And as a reminder, unlike a tax deduction, which merely exempts a portion of your income from taxes, a credit results in a dollar-for-dollar reduction of your tax liability.
Adding a child to your family might also render you eligible for the Earned Income Tax Credit, a credit designed to help low-income households. And if you wind up having to pay for child care during the year, you might also be eligible for some tax savings via the Child and Dependent Care Credit.
They say change is rarely easy, but from a tax perspective, all of the above milestones can actually end up helping you. Of course, each of these life events is worth pursuing in its own right, regardless of the tax implications involved, but it never hurts to know that you might actually save a little money in the process.
